26 U.S.C. § 986
Determination of foreign taxes and foreign corporation’s earnings and profits
# (a) Foreign income taxes
(1) Translation of accrued taxes (A) In general For purposes of determining the amount of the foreign tax credit, in the case of a taxpayer who takes foreign income taxes into account when accrued, the amount of any foreign income taxes (and any adjustment thereto) shall be translated into dollars by using the average exchange rate for the taxable year to which such taxes relate.
(B) Exception for certain taxes Subparagraph (A) shall not apply to any foreign income taxes— (i) paid after the date 2 years after the close of the taxable year to which such taxes relate, or (ii) paid before the beginning of the taxable year to which such taxes relate.
(C) Exception for inflationary currencies Subparagraph (A) shall not apply to any foreign income taxes the liability for which is denominated in any inflationary currency (as determined under regulations).
(D) Elective exception for taxes paid other than in functional currency (i) In general At the election of the taxpayer, subparagraph (A) shall not apply to any foreign income taxes the liability for which is denominated in any currency other than in the taxpayer’s functional currency. (ii) Application to qualified business units An election under this subparagraph may apply to foreign income taxes attributable to a qualified business unit in accordance with regulations prescribed by the Secretary. (iii) Election Any such election shall apply to the taxable year for which made and all subsequent taxable years unless revoked with the consent of the Secretary.
(E) Special rule for regulated investment companies In the case of a regulated investment company which takes into account income on an accrual basis, subparagraphs (A) through (D) shall not apply and foreign income taxes paid or accrued with respect to such income shall be translated into dollars using the exchange rate as of the date the income accrues.
(F) Cross reference For adjustments where tax is not paid within 2 years, see section 905(c).
(2) Translation of taxes to which paragraph (1) does not apply For purposes of determining the amount of the foreign tax credit, in the case of any foreign income taxes to which subparagraph (A) or (E) of paragraph (1) does not apply— (A) such taxes shall be translated into dollars using the exchange rates as of the time such taxes were paid to the foreign country or possession of the United States, and (B) any adjustment to the amount of such taxes shall be translated into dollars using— (i) except as provided in clause (ii), the exchange rate as of the time when such adjustment is paid to the foreign country or possession, or (ii) in the case of any refund or credit of foreign income taxes, using the exchange rate as of the time of the original payment of such foreign income taxes.
(3) Authority to permit use of average rates To the extent prescribed in regulations, the average exchange rate for the period (specified in such regulations) during which the taxes or adjustment is paid may be used instead of the exchange rate as of the time of such payment.
(4) Foreign income taxes For purposes of this subsection, the term “foreign income taxes” means any income, war profits, or excess profits taxes paid or accrued to any foreign country or to any possession of the United States.
# (b) Earnings and profits and distributions
For purposes of determining the tax under this subtitle— (1) of any shareholder of any foreign corporation, the earnings and profits of such corporation shall be determined in the corporation’s functional currency, and (2) in the case of any United States person, the earnings and profits determined under paragraph (1) (when distributed, deemed distributed, or otherwise taken into account under this subtitle) shall (if necessary) be translated into dollars using the appropriate exchange rate.
# (c) Previously taxed earnings and profits
(1) In general Foreign currency gain or loss with respect to distributions of previously taxed earnings and profits (as described in section 959 or 1293(c)) attributable to movements in exchange rates between the times of deemed and actual distribution shall be recognized and treated as ordinary income or loss from the same source as the associated income inclusion. (2) Distributions through tiers The Secretary shall prescribe regulations with respect to the treatment of distributions of previously taxed earnings and profits through tiers of foreign corporations.
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Cited by 20
- 26 CFR § 1.367(b)-2 — Definitions and special rules.
- 26 CFR § 1.367(b)-3 — Repatriation of foreign corporate assets in certain nonrecognition transactions.
- 26 CFR § 1.6038-2 — Information returns required of United States persons with respect to annual accounting periods of certain foreign corporations.
- 26 CFR § 1.901-2 — Income, war profits, or excess profits tax paid or accrued.
- 26 CFR § 1.904-4 — Separate application of section 904 with respect to certain categories of income.
- 26 CFR § 1.905-3 — Adjustments to U.S. tax liability and to current earnings and profits as a result of a foreign tax redetermination.
- 26 CFR § 1.905-4 — Notification of foreign tax redetermination.
- 26 CFR § 1.960-1 — Overview, definitions, and computational rules for determining foreign income taxes deemed paid under section 960(a), (b), and (d).
- 26 CFR § 1.960-3 — Foreign income taxes deemed paid under section 960(b).
- 26 CFR § 1.964-1 — Determination of the earnings and profits of a foreign corporation.
- 26 CFR § 1.965-1 — Overview, general rules, and definitions.
- 26 CFR § 1.985-5 — Adjustments required upon change in functional currency.
Show 8 more
- 26 CFR § 1.985-7 — Adjustments required in connection with a change to DASTM.
- 26 CFR § 1.986(a)-1 — Translation of foreign income taxes for purposes of the foreign tax credit.
- 26 CFR § 1.986(c)-1 — Coordination with section 965.
- 26 CFR § 1.987-3 — Determination of section 987 taxable income or loss of an owner of a section 987 QBU.
- 26 CFR § 1.987-3T — Determination of section 987 taxable income or loss of an owner of a section 987 QBU (temporary).
- 26 CFR § 1.987-4 — Determination of net unrecognized section 987 gain or loss of a section 987 QBU.
- 26 U.S.C. § 905 — Applicable rules
- 26 U.S.C. § 909 — Suspension of taxes and credits until related income taken into account
Nearby sections (25 sections)
- 960 · Deemed paid credit for subpart F inclusions
- 961 · Adjustments to basis of stock in controlled foreign corporations…
- 962 · Election by individuals to be subject to tax at corporate rates
- 963 · Repealed. Pub. L. 94–12, title VI, § 602(a)(1), Mar. 29, 1975, 89…
- 964 · Miscellaneous provisions
- 965 · Treatment of deferred foreign income upon transition to…
- 970 · Reduction of subpart F income of export trade corporations
- 971 · Definitions
- 972 · Repealed. Pub. L. 94–455, title XIX, § 1901(a)(120), Oct. 4,…
- 981 · Repealed. Pub. L. 94–455, title X, § 1012(b)(2), Oct. 4, 1976, 90…
- 982 · Admissibility of documentation maintained in foreign countries
- 985 · Functional currency
- 986 · Determination of foreign taxes and foreign corporation’s earnings…
- 987 · Branch transactions
- 988 · Treatment of certain foreign currency transactions
- 989 · Other definitions and special rules
- 991 · Taxation of a domestic international sales corporation
- 992 · Requirements of a domestic international sales corporation
- 993 · Definitions and special rules
- 994 · Inter-company pricing rules
- 995 · Taxation of DISC income to shareholders
- 996 · Rules for allocation in the case of distributions and losses
- 997 · Special subchapter C rules
- 999 · Reports by taxpayers; determinations
- 1000 · Reserved