Tax Jurisdiction







Subchapter N (Sections 861-999) is organized into 5 parts:
o Part I, Source Rules and Other General Rules Relating to Foreign Income (Code Secs. 861-865)
o Part II, Nonresident Aliens and Foreign Corporations (Code Secs. 871-898)
o Part III, Income from Sources Without the US (Code Secs. 901-989)
 FTC 901-909
 Subpart F
 CFC 951-965
o Part IV, Domestic International Sales Corporations (Code Secs. 991-997)
o Part V, International Boycott Determinations (Code Sec. 999)
US taxes US persons on “all income from whatever source derived”
o US persons include US citizens, resident alien individuals (alien is considered the lawful
permanent resident test aka green card test or the substantial physical presence test), and
domestic corporations
Double taxation = in international tax double taxation is when TP is taxed in two different tax
jurisdictions on the same income
US was a worldwide system, now a territorial system w/ TCJA
o Quasi-worldwide  in practice, TP can defer because income earned by foreign corporations
until repatriated as a dividend; TCJA moved to territorial w/ DRD
Territorial system – home country taxes citizens and residents only on income derived from sources
within the home country, but allows them to exclude form taxation all income derived from host country
sources
o The host-country source income of a citizen or resident is taxed only one time at the host
country’s rate
o If the host country tax rate is lower than the home country rate the TP pays only the lower host
country tax
o If the host country tax rate is higher than the home country rate the host-country source income
is taxed once at the higher host country rate
Credit system – the home country taxes both the home country-source income and the host countrysource income of its citizens and residents, but allows a credit for any taxes paid on that host countrysource income to the host country
o In effect, home country asserts a secondary jurisdiction over the host country-source income of
its citizens and residents
o The claim is secondary as its citizens and residents can claim an FTC to the extent that the host
country taxes their income earned in the host country
o The net result is that host country-source income incurs tax only one time at the higher of the
host country’s rate or the home country’s rate
Code Sections:
o § 7701(a) Resident Definition
o § 7701(b) Definition of Resident Alien and NRA
Residents vs. Non-Residents

Resident Alien Individuals – An alien is treated as resident of US w/ respect to any year if they: (taxed
under § 1 as individuals)
o Green Card Test (Lawful Permanent Residence)
 An alien individual is a US resident for a calendar year if, at any time during that
calendar year, the alien is a lawful permanent resident of the US


An alien qualified as a lawful permanent resident of the US if he has been lawfully
accorded, and has not revoked or abandoned, the privilege of residing permanently in the
US as an immigrant
 These “green card” holders are US residents for tax purposes regardless or whether they
are actually physically present in the US during the year
 This rule forces aliens who have obtained a green card and occasionally come to the US,
but have not yet moved to the US on a permanent basis to US taxes on their wwi
o Substantial Presence Test (§ 7701(b)(4))
 Present in US at least 31 days that year AND sum of days in US during that year and
previous 2 years is greater than 183 days
 An alien who does not hold a green card is a US resident for a calendar year if she is
physically present in the US for 183 or more days during that year
 Includes carryover days, which extends US residence to aliens whose stay in the US is
prolonged, but is less than 183 days in any given calendar year
 Except where present in the US less than half of current year and closer connection to
foreign country is established (this exception not applicable if that year, person applied
for adjustment of status pending OR took other steps to get lawful permanent residence)
o First Year election, test in § 7701(b)(4)
 Deemed to meet requirements if:
 Not resident of US
 Wasn’t resident of the US the previous year
 Is a resident the following year, AND
 Is both present in US for at least 31 consecutive days in election year AND in US
during first day of 31-day period and ending with last day of election year
 If met  treated as resident
NRAIs (How NRAIs are taxed)
o Individuals who are neither a citizen of the US nor a resident of the US
o Gross Income includes only: (§ 872(a))
 Gross income derived from sources within the US not ECI/ETC, AND
 For sources within the US  see Sourcing
 GI ECI/ETB
o ECI/ETB (§ 871(b))
 NRA engaged in trade or business within the US shall be taxable per §§1 or 55 on ECI
with conduct of trade or business within the US
 NRAs who own real property as investment can elect to treat the rental income as ECI (§
871(d))
 GI = only GI ECI/ETB § 871(b)(2)
o FDAP (§ 871(a))
 Noncapital gains on income received from sources within the US by NRA taxed at 30%
(§ 871(a)(1)(A))
 FDAP = interest, dividends, rents, salaries, wages, premiums, annuities, compensations,
remunerations, emoluments, and other fixed or determinable annual or periodical gains,
profits, and income
o Deductions:
 For NRAI, deduction allowed only for § 871(b) (ECI/ETB) and only if and to the extent
they are ECI/ETB (§ 873(a))
 Following deduction allowable regardless of ECI/ETB (§ 873(b))
 Losses for casualty/theft if property is located within the US under § 165(c)
 Charitable contributions under § 170
 Personal exemption under § 151 only one allowed unless TP is a resident of a
contiguous country or is a US national

o May be received by NRAI by filing a claim with the withholding agent for
tax withheld at source (§ 874(b))
 NRAI only gets deduction if they file a true and accurate tax return per subtitle F,
§ 874(a)
 FTC  See FTC
 Except per § 906, no FTC for NRAI for taxes of foreign countries/possession of
the US allowed by § 901, § 874(c)
o Withholding Regime (§ 1441)
 Kicks in when doing business in US wants to send money outbound
 Except as provided, all persons having control of any items of income of any NRAI or
foreign partnership shall deduct/withhold from such items a tax equal to 30% (1441(a))
 Income items subject to 14% tax are qualified scholarship OR specified
scholarship/fellowship for study, training, research in US  § 1441(b)(1)-(2)
 EXCEPTIONS: (1441(c))
o No deductions/withholding for any item of income ECI/ETB within the
US and included in GI under § 872(b)(2)
 Income Items:
 Interest, dividends, rent, salaries, wages, premiums, annuities, compensation,
remunerations, emoluments, other FRAPs, and income, gains, amounts subject to
tax under §§ 871(a)(1)(C) and (D), § 1441(b)
Corporations – tax imposed under § 11
o US corporation is taxable on its wwi if incorporated, created, or organized in the US (§§
7701(a)(3),(4))
 Check-the-box Regs – Certain business entities that aren’t corporations can elect for US
tax purposes to be treated as a corporation
 Business entity incorporated under US federal/state law
 Business entity formed under foreign law is a corporation for US tax purposes if
form of entity is specifically listed in the regs (“per se” corporations)
 Business entity is not treated as a corporation under the above can elect
classification (under Form 8832) for US tax purposes
o A Foreign Corporation is taxable under §§ 881 and 882 on income effectively connected with the
conduct of a trade or business in the US (ECI/ETB) or on specified US investment income
(7701(a)(5))
o FCC – Foreign Controlled Corporation (in the US, controlled by non-US citizens)
o CFC – Controlled Foreign Corporation (abroad, controlled by US citizens)
o How Foreign Corporations are taxed:
 Gross Income – only includes § 882(b)
 GI derived from sources within the US and not ECI/ETB AND
o For sources within the US  See Sourcing
 GI ECI/ETB
 Exclusions from Foreign Corporation GI (§ 883)
o Income from ships/aircraft
o Earnings from communications satellite system
 ECI/ETB (§ 882(d))
 Tax on income of foreign corps connected with USTB
 Foreign corporation engaged in trade or business within the US shall be taxable
per sections 11, 55, or 59A on effectively connected income with conduct of trade
or business within the US
 Foreign corps who own real property as investment can elect to treat the rental
income as ECI (§ 882(d))
 FDAP (§ 881)







Tax on income of foreign corporations not connected with USTB
30% tax on income from sources within the US by a foreign corporation as FDAP
 interest, dividends, rents, salaries, wages, premiums, annuities, compensations,
remunerations, emoluments, and other fixed determinable annual or periodical
gains, profits, and income (§ 881(a)(1))
o This 30% tax NOT imposed on any amount described in section 871(i)(2),
which is interest on deposits not ECI/ETB, active foreign business
percentage, dividends paid by foreign corp (under 861(a)(2)(B)) treated as
income from sources within the US (881(d))
Tax on citizens/Corporations of certain foreign countries doubled under§ 891, § 881(f)
(by President)
Deductions and Credits (§ 882(c))
 Deductions allowed for ECI/ETB only if and to the extent they are ECI/ETB
 § 170 charitable deduction allowed whether or not ECI/ETB
 Allowed only if true and accurate tax return is filed
 FTC  See FTC
o Except per § 906, no FTC for foreign corporation for taxes of foreign
countries/possession of the US allowed by section 901, section 882(c)(3)
Withholding regime (§ 1442b)
 All persons having control of any items of income of any foreign corps shall
deduct/withhold from such items a tax equal to 30% (1442(a))
o EXCEPTIONS: 1442(a)
 No deductions/withholding for any item of income ECI/ETB
within the US and including GI under 882(a)(2)
o EXEMPTION: 1442(b)
 N/A for a foreign corporation ETB within the US if secretary
determines requirements of this section would impose an
administrative burden and collection of tax per § 881 will not be
jeopardized by exemption
 Income Items:
o Interest, dividends, rent, salaries, wages, premiums, annuities,
compensation, remunerations, emoluments, other FRAPs, and income,
gains, amounts subject to tax under §§ 881(a)(3) and (4), § 1442(a)
ECI/ETB
Special Rules
Sourcing (§§ 861-865)
General Rules for Sourcing Gross Income
Type of income
Interest income
Dividends
Personal services income
Rentals and royalties
Gain on the sale of real property
Gain on the sale of personal
property
Income from the sale of
inventory purchased for resale
US-source income if:
Debtor is a US resident or a US
corp
Payer is a US corp
Services are performed in the US
Property is used in the US
Property is located in the US
Seller is a US resident
Foreign-source income if:
Debtor is a foreign resident or a
foreign corp
Payer is a foreign corp
Services performed abroad
Property is used abroad
Property is located abroad
Seller is a foreign resident
Title passes in the US
Title passes abroad
Gain on the sale of depreciable
property
Gain on the sale of patents and
other intangible property

Title passes in the US
Title passes abroad
Seller is a US resident
*Diff rules apply to the portion of
the gain attributable to prior-year
depreciation deductions.
Seller is a foreign resident
*Diff rules apply if either the
intangible is sold for a contingent
price or if a portion of the gain is
attributable to prior year
amortization deductions.
Income from sources within US (§ 861)
o Interest
 Interest from the United States, and interest on bonds, notes, or other interest-bearing
obligations of noncorporate residents or domestic corporations not including:
 Deposits made with a foreign branch of a US corp or partnership engaged in
commercial banking business (foreign source)
 Interest paid to a 10%+ US SH by a foreign corp that is at least 50% owned by
US persons is US source income to the extent the interest payment is attributable
to income that the foreign corp derived from US sources (this exception applies
only for purposes of computing the FTC limitation so to prevent US SHs from
artificially increasing their FTC limitation by routing US source income through a
US owned foreign corp)
 Interest paid by a US branch of a foreign corp is sourced as if it were paid by a
US corp (makes the interest US source income and potentially subject to US
WHT)
o Dividends
 Dividends received from
 domestic corporation OR
 foreign corporation UNLESS less than 25% of GI from corporation’s sources was
effectively connected with conduct of a USTB (the US source portion of the
dividend is not subject to US WHT)
o Personal Services
 Compensation for labor/personal services performed in the US EXCEPT IF:
 Labor/services performed by NRA temporarily present in the US for less than 90
days that year
 Compensation doesn’t exceed $3k
 Compensation is for labor/services performed as an employee of a corporation or
under a contract with – an NRA, foreign partnership, or foreign corporation, not
engaged in USTB OR the foreign office of a US person
o Rentals/Royalties
 From property located in the US/interest in such property including for use of/privilege or
using in the US patents, copyright, secret processes/formulas, goodwill, TMs, trade
brands, franchises
o Sale/Exchange of Real Property
 Gains/profits/income from disposition of US real property interest
 US real property interest includes: (i) Land and unsevered natural products of the land,
including growing crops, timber, mines, wells, and other natural deposits; (ii)
improvements on land, including buildings and other inherently permanent structures;
and (iii) personal property associated with the use of real property, such as mining and
farming equipment
 Also includes shares of a corporation that is, or was, a US real property holding
corporation at any time during the five year period preceding the disposition



FIRPTA – Foreign Investment Real Property Tax Act (§ 897(c))
 Foreign TP ETB in US, no withholding
 Disposal of real property in US  withholding requirement
 Places gain/loss and makes it ECI/ETB if you have an NRA or foreign
corporation
o Inventory
 Gains/profits/income derived from purchase of inventory without the US (other than
within possession of the US) and its sale/exchange within the US
 Inventory = stock in trade of TP or other property of a kind which would properly be
included in the inventory of the TP if on hand OR property held by TP primarily for sale
to customers in ordinary course of trade/business (§865(i)(1)  § 1221(a)(1))
 For purposes of this source rule, the following TPs are considered to be US residents:
 US corporation
 US citizen or resident alien who does not have a tax home in a foreign country
 NRA who has a tax home in the US, and
 A trust or estate whose situs is in the US
Income from sources without US (§ 862(a))
o (1) Interest – other than derived from sources within the US
o (2) Dividends – other than derived from sources within the US
o (3) Compensation for labor/personal services – if performed without the US
o (4) Rentals/royalties – property located without the US or privilege of using without the US
o (5) Inventory – gains/profits/income derived from purchase of inventory property within the US
and its sale/exchange without the US
Special Rules
o Income partly within and partly without the US
 Gains, profits, income below shall be treated as derived partly from sources within and
partly from sources without 
 From services rendered partly within/partly without US
 From sale/exchange of inventory sold within and without the US OR produced
by TP without and sold/exchanged within
o This income shall be allocated and apportioned between sources within
and without the US solely on the basis of the production activities with
respect to the property (flush language of § 863(b))
o Produced without, sold within  part within part without
o Produced within, sold without  part within part without
 Derived from purchase of inventory within a possession of the US and
sold/exchanged within the US
o Transport Income (§ 863(c))
 Transportation that begins and ends in the US  treated as sources within the US
o Personal property sales, inventory, intangibles (§ 865)
 Personal property sold by US resident = US sourced
 Purchased without, sold within  US source
 Personal property sold by NRA = sourced outside US
 Purchased within, sold without  foreign source
 EXCEPTIONS:
 If personal prop is inventory  §865 N/A, §865(b)
o Income sourced under §§861(a)(6), 872(a)(6), 863
o See definition of inventory above
 If depreciable personal prop  Gain from sale allocated to sources within and
outside the US, §865(c)


o Depreciable personal prop = any personal prop if AB incl depreciation
adjustments (aka depreciation deduction)
o Treat same proportion of gain as sourced in the US as the US depreciation
adjustments AND
o Remaining portion as outside US
o Gain in excess of depreciation deduction sourced as if prop were
inventory
 Intangibles, §865(d)
o Intangible = patent, ©, secret process/formula, goodwill, tm, trade brand,
franchise, etc., §865(d)(2)
o For sale of intangible  §865(d)(1)
 §865 only applies to the extent payments for consideration of such
sale are not contingent on productivity, use, disposition of
intangible AND
 If payments are contingent, sources of payments determined as if
such payments were royalties (see §§861(a)(4) or 862(a)(4))
 For sale of goodwill  payments in consideration for such sale
treated as from sources of country in which goodwill was
generated, §865(d)(3)
 For sales through offices/fixed places of business, §865(e)
o Office/FPOB determined per §864(c)(5)
o (1) Sale by Resident w/office in foreign country 
 NOT sourced under §865(b), (c), (d)(1)(B) or (d)(3), or (f) (aka,
not inventory, depreciable personal prop, intangibles, or stock of
affiliate)
 THEN Income from sales of personal prop attributable to that
office = sourced outside US
 ONLY IF income tax = 10% of income from sale actually paid to
that foreign country
o (2) Sale by Non-Resident w/office in US 
o Income from any sale of personal prop (INCL INVENTORY)
attributable to that office = sourced within the US
 N/A for §971 (export trade corp)
 N/A for sale of inventory sold for use/consumption outside the US
if office of TP in foreign country materially participated in sale
Relevance and application of §§ 865(g) and (d)
Definitions
o Trade or Business Within the US (ETB), §864(b)
 Includes performance of personal services within the US, but does NOT include:
 (1) Performance of personal services for foreign ER
 (2) Trading in securities or commodities
o Effectively Connected Income (ECI), §864(c)
 (1) NRA or Foreign corp ETB, (2), (3), (4), (6), (7) apply in determining income, gain,
loss treated as ECI/ETB
 Except as provided in (6), (7), (8) or §§871(d), 882(d), (e), for an NRAI or foreign
corp NOT ETB  no income, gain, loss treated as ECI/ETB within US
 (2) Periodical income from sources within US – factors for determining if income from
sources within the US per §§871(a)(1), 871(h), 881(a), 881(c) or for G/L from sources
within US from sale/exchange of capital assets = ECI/ETB: whether –
 Income, gain, loss is derived from assets used in/held for use in conduct such as
trade/bus





Activities of such trade/bus were material factor in realization of income, gain,
loss
(3) All income, gain, loss from sources within the US treated as ECI/ETB
(4) Income from sources without the US
 (A) No income, gain, loss from sources w/out the US treated as ECI/ETB except:
o By NRAI/foreign corp if such person has an office or other fixed place of
business within the US to attribute income, gain, loss If income, gain, loss
= rents/royalties, dividends, interest, amounts received, derived from
sale/exchange of capital asset personal prop, §864(c)(4)(B)
 Office/Fixed place of bus: §864(c)(5)
 Agent in office/fixed POB has auth to negotiate/conclude
Ks for NRAI/foreign corp AND regularly exercises that
authority OR has stock of merch he regularly fills for such
individual/foreign corp AND
o Isn’t a gen commission agent, broker, etc.
 Such office/FPOB is material factor in production of
income, gain, loss
 Income attributable to office/FPOB NOT exceeds income
which would be derived from sources within US if
sale/exchange were made in US
 N/A if used mainly used outside US or foreign business
participated materially
 (D) No income from sources without the US treated as ECI/ETB if either 
o Consists of dividends, interest, royalties paid by foreign corp in which TP
owns more than 50% combined voting power OR
o Is Subpart F income per §952(a), See Subpart F
Expatriation
Expatriation to avoid tax: (§ 877)
o NRAI who lost US citizenship within 10 years taxable if that tax exceeds the tax imposed per §
871 (ECI/ETB + FDAP)
 Expats subject to tax: average annual net income tax before loss of US citizenship >
124k, net worth as before loss of US citizenship > 2 M, OR fails to certify compliance as
Secretary may require
 Expat tax = under §1 or 55 except GI only §872(a) US source income not ECI/ETB and
deduction allowed if they are connected with GI, §877(b)
 Reduced by amount of income, war profits, excess profits taxes (see §903) paid to
any foreign country
 Except:
 Dual citizens – US citizen and citizen of another country at birth + no substantial
contacts w/US, §877(c)(2)
 Certain minors if US citizen at birth, neither parent was a US citizen at minors’
birth, loss of US citizenship was before age 18.5 and presence test, §877(c)(3)
o Tax Responsibilities: §877A
 All property treated as sold on the day before expatriation for FMV, §877A(a)(1)
 Any gain must be taken into account AND any loss shall be taken into account,
§877A(a)(2)
 Amount that would be includible in GI due to the treated sale shall be reduced by
600k (but not below 0), §877A(a)(3)(A)
Congress deems a US citizen as having sold all his asserts for FMV on the day before the expatriation
occurs; if the expatriate either






o (a) has an average annual net income tax obligation to the US for the 5 years preceding the
expatriation that exceeds an inflation-adjusted base amount of tax ($168k in 2019 and $177k in
2020),
o (b) has a net worth greater than or equal to $2 million as of the date of the expatriation, or
o (c) fails to certify to the IRS that he complied (or to provide the IRS with evidence of such
compliance)
TP may exclude an inflation-adjusted base amount of market-to-market gain ($725k in 2019 and $737k
in 2020)
This regime similarly applies to long-term residents, who are defined as aliens who are residents due to
green card test in 8 of the prior 15 taxable years, but relinquish their green card
BPT (§ 884)
In addition to § 882 tax on ECI/ETB, tax on foreign corporation’s US branch – BPT = 30% (subject to
treaty reductions) of a foreign corporation’s dividend equivalent amount, which is an estimate of the
amount of effectively connected E&P that a US branch remits to its foreign home office during the year
o Dividend equivalent amount = foreign corporation’s effectively connected E&Ps of the taxable
year adjusted for:
 If US net equity of taxable year exceeds US net equity of previous year  effectively
connected E&P reduced by that excess (884(b)(1))
 If US net equity of previous year exceeds US net equity of taxable year  effectively
connected E&Ps increased by the excess (884(b)(2))
 US net equity = US assets (including below 0) reduced by US liabilities
 Effectively connected E&P = E&P attributable to ECI/ETB
o Treaty Exemption  no treaty shall exempt the BPT unless treaty is an income tax treaty and
foreign corporation is a qualified resident of that foreign country
o Reinvesting in qualified US assets
If foreign corp is subject to BPT, no tax imposed by §§ 871(a), 881(a), 1441, 1442 out of its E&P
o i.e., no tax on FDAP (30%) or WHT (30%)
A foreign corporation engaged in USTB is also subject to the BPT, the purpose of which is to better
equate the tax treatment of a foreign corporation’s US branch and subsidiary operations
A foreign corporation’s US branch operation may also be subject to the tax on excess interest




Subpart F Income of CFCs
CFC – Controlled Foreign Corporation (§ 957(a))
o CFC = a non-US corporation in which US SHs own (on any day of the foreign
corporation’s tax year) at least 50% of the:
 1) combined voting power of all voting stock, OR
 2) the total value of the stock
o US SH = US person that owns at least 10% of the combined voting stock
 Owns stock = indirectly or indirectly by or for a foreign corporation, foreign partnership,
foreign trust, foreign estate (§ 958)
US SHs are taxed on their pro rata share of subpart F income (constructive dividend)
Amounts included in Gross Income of US SHs of CFCs:
o US SH owns stock in CFC, GI includes: (§ 951)
 Pro rata share of subpart F income + 951(a)(1)(A)
 Amount which would have been distributed with respect to the stock owned if the
corporation had distributed pro rata to its SHs an amount which bears the same
ratio to its subpart F income as to the entire year
 MINUS amount of distributions received by any other person during such year as
a dividend with respect to such stock
 Amount attributable to a qualified activity may be reduced by amount of pro rata
share of qualified deficit (952(c)(1)(B))
o Qualified activity = any activity giving rise to foreign base company sales
income, foreign base company services income, insurance income, foreign
personal holding company income
o Qualified deficit = any deficit in E&P of CFC to the extent such deficit is
attributable to the same qualified activity giving rise to income offset and
not previously accounted for
 § 956 Investment on Earnings in US Property (951)
 Lesser of  § 956(a)
o Excess of SH pro rata share of average amounts of US property held by
CFC – amount of E&P attributable to US property OR
 US Property = property acquired after 12/31/1962 which is –
tangible prop in the US, stock of a domestic corp, an obligation of
a US Person, or any right to use in the US an intangible (patent/©,
invention/model/design, secret formula/process, any other similar
right acquired/developed by the CFC for use in the US) §956(c)(1)
 ≠ obligations of the US or money, deposits w/specific
banks/corps, prop located in the US purchased in the US
for export/use in foreign countries, etc., §956(c)(2)
o SH pro rata share of applicable earnings of CFC
 to the extent not excluded from GI under §959(a)(2) (PTEP/PTI)
o US SH can exclude from GI E&P of CFC attributable to amounts which
are/have been included in GI of US S/H under §951(a), §959(b)
o distributions from GI of previously taxed E&P (PTEPs)
 E&Ps previously taxed under §956 are considered PTEP
Subpart F Income: (§ 952)
o Sum of:
 Insurance income
 Foreign base company income, §954
o Sum of: §954(a)
 Foreign personal holding company income (c) reduced by (b)(5)





Income which consists of – dividends, gains minus losses from sale of
prop, commodities transaction, foreign currency gains, etc.
 Passive income
Foreign base company SALES income (d) reduced by (b)(5)
 Income derived in connection w/purchase of personal prop from a
related person and its sale to any person where prop purchased is
manufactured (etc.) outside the US under laws the CFC was created
AND prop is sold for use outside such foreign country
o Related person = person is an individual, corp, partnership, trust,
estate which controls, or is controlled by, the CFC OR person is a
corp, partnership, trust, estate, controlled by the same
person/persons which control the CFC, §954(d)(3)
 Manufacturing Exception Tests (Treasury Reg. § 1.954-3)
o Substantial Transformation
 Requires CFC to substantially transform the property prior to
the on sale to customers
 Facts and circumstances test
o Component Parts
 Conversion of parts into final goods
 The assembly or conversion of the component parts into the
final product by the selling CFC involves activities that are
substantial in nature
 Safe harbor – if the costs = or greater than 20% of the COGS
 Caveat: packaging, repackaging, labeling are specifically
excluded activities for purposes of the component parts test
o Substantial Contribution
 If the CFC substantially contributed to the manufacturing
process, even if the CFC did not physically manufacture the
goods
 Non-exclusive list of various activities by the CFC (not
independent contractors) to determine whether the CFC has
substantially contributed to the manufacturing process:
 Oversight and direction of manufacturing activities;
 Material and vendor selection and control of raw materials;
 Management of manufacturing costs or capacities;
 Control of manufacturing-related logistics;
 Quality control; and
 Development of intellectual property
Foreign base company SERVICES income (e) reduced by (b)(5)
 Income derived in connection w/performance of technical, managerial,
engineering, architectural, scientific, skilled, etc. which are performed for
or on behalf of any related person AND are performed outside the US
under laws the CFC was created
(b)(5) – reduced under Regs to take into account deduction (incl taxes)
properly allocable to such income
Product of:
o Income other than E&P in GI of US person under §951 or
 Income from sources ECI/ETB, §952(b)
MULTIPLIED BY
o Int’l boycott factor (§999)

Sum of amounts of any illegal bribes, kickbacks, other payments paid on behalf of the
corporation
 Income of such corporation derived from any foreign country during which §901(j)
applies
o Country US doesn’t recognize, severed diplomatic relations, no diplomatic relations,
supports int’l terrorisms, §901(j)(2)(A)
o Limitation: §952(c)
 Subpart F income of a CFC shall not exceed that year’s E&Ps
o Dividend Received Deductions (DRD) §245A (aka “Participation Exemption”)
 If US corporate SH and owns 10%+ of the voting stock of a foreign company and
receives a dividend distribution from that foreign corporation  can claim a 100% DRD
for the foreign source portion of any dividend received from such company after Dec 31,
2017
o Shares of a foreign corporation that a partnership owns are considered owned
proportionately by its corporate partners
o Dividends (for purposes of the DRD) include both distributions of property out of a
foreign corporation’s E&P and transactions that the Code recharacterizes as
dividends, such as gains on the sale of shares of a CFC and some of a CFC’s
investments in US property
 No FTC allowed in addition to 245A DRD
 To be able to claim the DRD, the SH generally must hold its stake in the foreign
company for more than 365 days in the two-year period surrounding the dividend date
 No exemption for foreign branch earnings
 Only corporate SHs can claim the DRD – the deduction is not available to individual
owners of foreign companies
 DRD cannot be claimed for dividends from CFCs that are “hybrid dividends,” defined as
any dividend for which the foreign company received a deduction or other tax benefit (§
245A(e))
o Deemed paid credit for Subpart F Inclusions, §960 (must make election)
 If Domestic Corp is a US SH of a CFC, and Domestic Corporation includes in GI any item
under §951(a)(1), Dom Corp deemed to have paid so much of CFC’s foreign income taxes
as are properly attributable to such item of income, §960(a)
o US parent Co treated as if it directly paid its allocable portion of income taxes by is
10% of more foreign Subsidiaries which they can receive an FTC (see FTC)
o See below for Gross Up §78
 If portion is excluded under §959(a), domestic corp deemed to have paid so much of CFC’s
foreign income taxes as – §960(b)(1)
o Properly attributable to such portion AND
o Not deemed to have to been paid by such Dom Corp
 If any amount is includible under §951A (see GILTI)  deemed to have paid foreign
income taxes = 80% (Domestic corporation’s inclusion % x aggregate tested foreign
income taxes paid/accrued by CFC), §960(d)(1)
o Inclusion %  §951A(b) GILTI / §951A(c)(1)(A) amount
 §951A(b)  see below GILTI amount
 §951(c)(1)(A)  S/H pro rata share of tested income for the year
o Tested foreign income taxes  foreign income taxes paid/accrued by such CFC
properly attributable to tested income accounted for in §951A
 Increase in FTC limitation under §904
o For a TP who: §960(c)
 Increase FTC limitation by Subpart F income
 Incl in GE §951(a) income OR didn’t pay/accrue any income, war profits,
excess profit taxes to foreign country

Chooses to have benefits receives 1 or more dists excludable from GI under
§959(a), AND
 For taxable year distributions received, pays, deemed to have paid, or accrues
income, war profits, excess profits taxes to foreign country,
 Limitation = increased by lesser of {amount of such taxes paid/deemed
paid/accrued} OR {amount in the excess limitation account as of the beginning
of that year}
o Indirect Earnings of business income
 §951A (see GILTI)
 §250 (see FDII)
 §245A Dividend Received Deduction
o For a dividend rec’d from a 10% owned FC (CFC)  dedux = foreign-source portion
of dividend
 Excluding PFICS, §245A(a)(2)
o Foreign-source portion = bears same ratio as foreign E&Ps of CFC to total
undistributed earnings, §245A(c)(1)
o No credit allowed under §901 (No FTC) w/respect to any dividend for which this
dedux is allowed, §245A(d)
 §965 – (“One Timer”)
o Inclusion for 2017 of previously deferred income of foreign corporation if TP owns
10% of more
 Repatriate your foreign income w/much lower tax rate
 US Gov’t thinks that now the deferred foreign income will come flooding
back into the US
 Corporations get 8 years to pay off tax, starting last year
 902 repealed as redundant, but 960 retained

Foreign Tax Credit
FTC:
o TP credited w/: §901(a)
 US Citizens + Domestic Corporations: §901(b)(1)
o Amount of any income, war profits, excess profits taxes paid/accrued to any foreign
country or possession of the US


Income, war profits, excess profits taxes incl tax paid in lieu of tax on income,
war profits, excess profits otherwise generally imposed by any foreign
country/possession of the US, §903
o Corporation – any taxes deemed paid under §960 – indirect tax credit, §901(a)
 Deemed paid taxes under §960 must be grossed up under §78
 If a domestic corporation elects FTC  amounts deemed paid under
§960(a), (b), (d) (without 80% limitation) for the year shall be treated as
a dividend received by the domestic corporation from the CFC, §78
 Treated as dividend received  such that it is added to a taxpayer’s
income for Credit calculation purposes
 Why: deems amt deemed to be paid without regard to 80% haircut  gross up
to ensure income is income
 Because US tries to tax on worldwide income, ppl would put their foreignstashed income so you gross up to figure out how much tax to pay to
accurately reflect income earned
 Deemed paid taxes  did not actually pay those taxes
 Resident or PR §901(b)(2)
o Amount of any taxes paid/accrued during the year to any possession of the US
 Alien Resident of US or PR §901(b)(3)
o Amount of any such taxes paid/accrued during the year to any foreign country
 NRAIs and Foreign Corps §901(b)(4)
o NRAI/Foreign Corp engaged in trade or business within the US allowed a credit for
amount of any income, war profits, excess profits taxes paid/accrued during the year
to any foreign country/possession of the US, §906(a)
 Taxable income treated as consisting only of taxable income ECI/ETB,
§906(b)(2)
 NO credit allowed against §871(a) tax (NRAI not ECI/ETB – i.e., FDAP) OR
§884 (Branch Profits Tax), Taxable income treated as consisting only of
taxable income ECI/ETB, §906(b)(3) and (6)
o When accounting for credit, ≠ taxes paid w/respect to income from sources within
the US, §906(b)(1)
o Credit
 If President finds foreign country doesn’t allow US citizens a credit for taxes paid in the
US, similar credit to (b)(3), foreign country doesn’t have a similar credit, or in pub
interest to allow (b)(3) credit to US citizens  (b)(3) credit allowed for US citizens
residing in foreign country, §901(c)
o NO credit allowed for income, war profits, excess profits taxes paid/accrued (or deemed paid
under §960) to countries the gov’t doesn’t recognize, has severed diplomatic relations, has no
diplomatic relations, or has supported int’l terrorisms, §901(j)
 If not allowed as deduction, §§275 and 78 N/A, §901(j)(3)
o Limitation on Credit (§ 904)
 Credit shall not exceed the same proportion of tax as TP taxable income from sources
without the US to entire taxable income  (Foreign Source Taxable income / Worldwide
Taxable income) x (US Tax on Worldwide Income)
 DRDs under §245A  “income” for purposes of credit limit ≠ foreign-source portion of
any dividend received from CFC AND deduction apportioned to income, stock, 245A,
§904(b)
Foreign tax DEDUCTION,
o Deduction for paid/accrued: §164
 State and local, and foreign, real prop taxes … state and local, and foreign, income, war
profits, excess profits taxes, §164(a)(1), (3)



…foreign taxes paid/accrued in carrying on a trade or business or activity in §212
(relating to expenses for production of income) (§164 Flush Lang)
o NO deduction allowed for the following taxes:
 Income, war profits, excess profits taxes imposed by the authority of any foreign country
or possession of the US if TP elects FTC under §901, §275(a)(4)
De Minimis FTCs
o An individual with $300 or less of creditable foreign taxes may elect to be exempt form the
foreign tax credit limitation, provided that he or she does not have any foreign-source income
other than passive investment income
Excess Credit vs. Excess Limitation:
o Excess Credit = when the foreign tax rate is higher than the US tax rate
 Creditable foreign taxes exceed the limitation
o Excess Limitation = when the foreign tax rate on a TP’s foreign-source income is lower than the
US tax rate
 The creditable foreign taxes are less than the limitation
o Other factors that impact the effective foreign tax rate, such as the use of different accounting
methods or local country tax incentives, will also affect whether a TP is in an excess limitation or
an excess credit position
o Strategies for Eliminating Excess Credits (p. 112)
 Foreign Tax Reduction Planning
 Increasing the Foreign Tax Limitation
o 1) By increasing the portion of worldwide income that the Code characterizes as
foreign-source income for US tax purposes
o 2) Recharacterizing expenses is another effective strategy to eliminate excess credits
– reduce a TP’s precredit US tax, regardless of how the TP apportions them (but if
the TP apportions the expenses to foreign-source income, the expenses also reduce
the foreign tax credit limitation)
 As a result a TP in an excess credit position derives no net US tax benefit
from expenses apportioned to foreign source income
 3) Cross Crediting
o Different items of foreign-source income have distinctly different effects on a TP in
an excess credit position
o Foreign-source income that bears foreign taxes at a rate higher than the US tax rate
increases a TP’s excess credits, whereas foreign source income that bears a low rate
of foreign income tax can reduce a TP’s excess credits
o Within a single foreign tax credit limitation, the excess credits on high tax foreign
source income are credited against the excess limitation on low tax foreign source
income
o Through “cross crediting” a TP averages the effects of individual items of high and
low tax foreign source income
o This averaging process produces an excess credit only when the average foreign tax
rate on all of the items of foreign source income within a single limitation is higher
than the US rate
FTC Formula: US tax liability based on wwi x [foreign source taxable income / worldwide income]
Example: USCo has $1 mil worldwide income, no US source and $1 mil from foreign
Creditable foreign taxes = 30% x 1 mil = $300k
FTC Limitation:
wwi 1 mil x 21% = $210k
$210k x ($1 mil / $1 mil) = $210k FTC limitation vs. $300k creditable foreign taxes
$90,000 excess foreign tax credits









GILTI (§ 951A)
Global Intangible Low-Taxed Income included in GI of US SH
o Applies to US SH of CFC
o Low tax jurisdiction
10% return on tangible assets and everything else deemed to be intangible assets
**IF YOU DON’T HAVE A CFC, YOU DON’T HAVE A GILTI INCLUSION**
GILTI § 951A(b)
o {Net CFC Tested Income} minus {Net Deemed Tangible income return} (NDTIR)
 Net CFC Tested Income
 {Aggregate of S/H pro rata share of tested income of CFC} – {aggregate of S/H
pro rata share of tested loss of CFC}
o Tested income  {Subpart F income + income foreign based by reason of
§954(b)(4) + dividend rec’d deduction §954(d)(3) + foreign oil/gas
extraction} MINUS {§954(b)(5) deduction}
 §954(b)(4)  foreign base company income and insurance income
if shown subject to effective rate of income tax imposed by foreign
country greater than 90% of max rate in §11
 §954(d)(3)  foreign base company sales income DRD
 §954(b)(5) See Above
o Tested loss  Excess of Deduction MINUS Tested Income
 Net deemed tangible income return
 (QBAI x 10%) MINUS interest expense accounted for in “tested income”
o QBAI (qualified business asset investment) = income producing property
receiving rent used in trade or business §167 deduction
GILTI DEDUCTION: (§ 250)
o 50% GILTI deduction
FDII (§ 250)
Covers intangibles - §367(d)(4) and 197  US Domestic Corporations to foreign
o Proxy for income earned by domestic Corps in excess of fixed return on tangible assets in US
derived from sale of prop (FDDEI) sold to foreign persons for foreign use
o Deduction for selling to someone outside the US a product in the US
FDII = [DII x (FDDEI / DEI)] x 37.5% (i.e., % in §250(a)(1)(A)
o DII Deemed Intangible Income = DEI – DTIR (Deemed tangible intangible income  QBAI x
10%)
o FDDEI Foreign Derived Deduction Eligible Income = Reg 1.250(b) – 4
 DEI derived in connection w/property sold by US TP to foreign person/used for foreign
things OR
 Services provided to a person/place not in the US
o DEI Deduction Eligible Income = {GI} – {§250(b)(3) exclusions – Allowable Deductions}
 Exclusions §250(b)(3) = Subpart F income, GILTI, financial services income, DRDs
from CFCs, domestic oil/gas income foreign branch income,
BEAT (§ 59A)
Base Erosion and Anti-Abuse Tax
o Applicable to corporations who have both:
 Averaged over $500M of gross receipts for the prior 3 years AND
 Exceeded a base erosion percentage of 3%
BEAT Formula
o Base Erosion % = Base Erosion tax benefit / all deductions for the year (except GILTI, FDII,
NOLs)






Does NOT include FDII, GILTI, DRDs
§ 55 Corporate Alternative Minimum Tax (AMT)
o Tentative minimum tax for taxable year MINUS
 Tentative minimum tax:
 Non-corporate: 26% of income above exemption amount + 28% of the excess
over 175k
 Exemption Amount = 109,400 for joint return/surviving spouse, 70,300 for
unmarried non-surviving spouse (TCJA adjustments)
 Corporations: 15% of adjusted financial statement income (per §56A) MINUS
corporate AMT foreign tax credit for the year
o §56A  net income/loss per applicable financial statements (like a 10K,
audited statement, etc.)
o Regular tax for taxable year (for corporations + § 59A BEAT tax)
o CAMT:
 The Inflation Reduction Act created the CAMT, which imposes a 15% minimum tax on
the adjusted financial statement income (AFSI) of large corporations for taxable years
beginning after Dec. 31, 2022. The CAMT generally applies to large corporations with
average annual financial statement income exceeding $1 billion.
o § 451(b) in relation to CAMT (§ 55)
 If you have an item of income on your applicable financial statement you need to include
it for tax purposes
 Used to be able to defer it but this section says no longer, you have to include it
 Refer to applicable financial statement to determine if there’s CAMT
US Citizens Living Abroad (§ 911)
At the election of a qualified individual, can exclude from GI foreign earned income of individual or
household, §911(a)
o Qualified individual = individual whose “tax home” is in a foreign country and is a citizen of the
US and establish bona fide resident of foreign country or citizen of US who is present in foreign
country for at least 330 days/year, §911(d)(1)
o Foreign earned income = amounts received from sources within a foreign country that are not
received as a pension/annuity, paid by the US or agency to an employee, included in GI by
§402(b), or received for services (§911(b))
o Limitation: shall not exceed amount of foreign earned income computed on a daily basis at an
annual rate equal to the exclusion amount for the year, §911(b)(2)
 Exclusion amount = 80k, §911(b)(2)(D)(i)
Exemption from gross income for civilian officers + employees of the US Gov’t, §912
o Foreign areas allowances
o Cost of living allowances
o Peace Corps allowances
Foreign Currency Translation and Transactions
Functional currency (§ 985)
o Functional currency = the dollar or currency of the econ env used for keeping books/records,
§985(a)
 TP may elect to use the dollar as functional currency
o Under § 985, a TP engaged in a trade or business that maintains its books and records in a
functional currency other than the U.S. dollar must compute its taxable income in the U.S. dollar
equivalent. The section provides rules for translating income, deductions, credits, and other items
from the functional currency into U.S. dollars for tax purposes.
Branch transactions, see §987








o If TP has one or more qualified business units w/functional currency other than the dollar, taxable
income determination
o § 987 → Qualified Business Units → provides rules for translating income, deductions, credits,
and other items from the functional currency of each QBU into the taxpayer's functional currency
(usually U.S. dollars) for tax purposes.
 A QBU defined in § 989
Treatment of certain foreign currency transactions
o See §988
Tax Treaties (p. 641)
Income tax treaties mitigate international double taxation through tax reductions or exemptions on
certain types of income derived by residents of one treaty country from sources within the other treaty
country
The US has also agreed to exchange information with 32 countries pursuant to Tax Information and
Exchange Agreements
US currently has income tax treaties with approximately 69 countries
Model Treaty (p. 677)
Common Treaty Provisions:
o Definition of Resident (Article 4)
o Business Profits (Article 7) and PEs (Article 5)
o a PE exists if the foreign person has a fixed place of business (e.g. sales office)in the US, unless
the fixed place of business is used solely for auxiliary functions (e.g., purchasing, storing,
displaying, or delivering inventory) or for activities of a preparatory nature
o Second, a PE exists if employees or other dependent agents (but not independent agents)
habitually exercise in the US an authority to conclude sales contracts in the foreign business’
name
o Personal Services Income
o Withholding on Dividends (Article 10), Interest (Article 11), and Royalties (Article 12)
 Article 10 Dividends:
 Outbound flow of the dividend/royalty – if it’s deductible Country A could say bc
you’re getting a dividend from our country can we tax you on that dividend
sourced from our country?
 Country A can tax the dividend but it shall not exceed the rate specified in the
treaty (Model is 5%)
 Article 12 Royalties:
 Tax paid by the sub and foreign tax paid by WTC in the form of a WHT so you
maybe have a deemed paid credit so the treaty in the royalty and dividend
provisions that’s where the amount is calculated
o Gains from the Disposition of Property (Article 13)
o Associated Enterprises (Article 9)
o Anti-treaty Shopping Provisions (Limitation on Benefits)(Article 22)
o Non-Discrimination Provisions (Article 24)
o Exchanges of Information (Article 26)
If there was a treaty in Country D where WTC has a branch: there’s likely to be double tax because the
US is taxing the branch on worldwide income and if Country D tries to tax WTC
Then Country D can only tax WTC on their profits if they have a PE (which the branch def is a
PE) in Country D → Country D limited to the profits attributable to the PE
o Article 7 – Business Profits (to determine amounts attributable to the PE)
 Can only tax profits attributable to the PE, not the worldwide operations
o Tax paid in Country D so you’ll have a credit or something?


Treaty in F1/F2:
o Paid a dividend and a royalty and received payments for the widgets they made and sold →
Article 10
o If there’s a foreign sub/CFC you don’t need to figure out if there’s a PE bc they’re already
subjected to the taxation of that local country
o PE issue where the foreign Canadian person was coming down into the US Sub and doing work
o Article 10 – Dividends:
 Outbound flow of the dividend/royalty – if it’s deductible Country A could say bc you’re
getting a dividend from our country can we tax you on that dividend sourced from our
country?
 Country A can tax the dividend but it shall not exceed the rate specified in the treaty
(Model is 5%)