§881 — Tax on income of foreign corporations not connected with United States business
32 cases·6 followed·1 distinguished·1 questioned·1 limited·23 cited—19% support
Statute Text — 26 U.S.C. §881
Except as provided in subsection (c), there is hereby imposed for each taxable year a tax of 30 percent of the amount received from sources within the United States by a foreign corporation as—
interest (other than original issue discount as defined in section 1273), dividends, rents, salaries, wages, premiums, annuities, compensations, remunerations, emoluments, and other fixed or determinable annual or periodical gains, profits, and income,
gains described in section 631(b) or (c),
in the case of—
a sale or exchange of an original issue discount obligation, the amount of the original issue discount accruing while such obligation was held by the foreign corporation (to the extent such discount was not theretofore taken into account under subparagraph (B)), and
a payment on an original issue discount obligation, an amount equal to the original issue discount accruing while such obligation was held by the foreign corporation (except that such original issue discount shall be taken into account under this subparagraph only to the extent such discount was not theretofore taken into account under this subparagraph and only to the extent that the tax thereon does not exceed the payment less the tax imposed by paragraph (1) thereon), and
gains from the sale or exchange after
October 4, 1966
, of patents, copyrights, secret processes and formulas, good will, trademarks, trade brands, franchises, and other like property, or of any interest in any such property, to the extent such gains are from payments which are contingent on the productivity, use, or disposition of the property or interest sold or exchanged,
but only to the extent the amount so received is not effectively connected with the conduct of a trade or business within the United States.
For purposes of this section and section 884, a corporation created or organized in Guam, American Samoa, the Northern Mariana Islands, or the Virgin Islands or under the law of any such possession shall not be treated as a foreign corporation for any taxable year if—
at all times during such taxable year less than 25 percent in value of the stock of such corporation is beneficially owned (directly or indirectly) by foreign persons,
at least 65 percent of the gross income of such corporation is shown to the satisfaction of the Secretary to be effectively connected with the conduct of a trade or business in such a possession or the United States for the 3-year period ending with the close of the taxable year of such corporation (or for such part of such period as the corporation or any predecessor has been in existence), and
no substantial part of the income of such corporation is used (directly or indirectly) to satisfy obligations to persons who are not bona fide residents of such a possession or the United States.
If dividends are received during a taxable year by a corporation—
created or organized in, or under the law of, the Commonwealth of Puerto Rico, and
with respect to which the requirements of subparagraphs (A), (B), and (C) of paragraph (1) are met for the taxable year,
subsection (a) shall be applied for such taxable year by substituting “10 percent” for “30 percent”.
If, on or after the date of the enactment of this paragraph, an increase in the rate of the Commonwealth of Puerto Rico’s withholding tax which is generally applicable to dividends paid to United States corporations not engaged in a trade or business in the Commonwealth to a rate greater than 10 percent takes effect, this paragraph shall not apply to dividends received on or after the effective date of the increase.
For purposes of paragraph (1), the term “foreign person” means any person other than—
a United States person, or
a person who would be a United States person if references to the United States in section 7701 included references to a possession of the United States.
For purposes of paragraph (1), the rules of section 318(a)(2) shall apply except that “5 percent” shall be substituted for “50 percent” in subparagraph (C) thereof.
In the case of any portfolio interest received by a foreign corporation from sources within the United States, no tax shall be imposed under paragraph (1) or (3) of subsection (a).
For purposes of this subsection, the term “portfolio interest” means any interest (including original issue discount) which—
would be subject to tax under subsection (a) but for this subsection, and
is paid on an obligation—
which is in registered form, and
with respect to which—
the person who would otherwise be required to deduct and withhold tax from such interest under section 1442(a) receives a statement which meets the requirements of section 871(h)(5) that the beneficial owner of the obligation is not a United States person, or
the Secretary has determined that such a statement is not required in order to carry out the purposes of this subsection.
For purposes of this subsection, the term “portfolio interest” shall not include any portfolio interest which—
except in the case of interest paid on an obligation of the United States, is received by a bank on an extension of credit made pursuant to a loan agreement entered into in the ordinary course of its trade or business,
is received by a 10-percent shareholder (within the meaning of section 871(h)(3)(B)), or
is received by a controlled foreign corporation from a related person (within the meaning of section 864(d)(4)).
For purposes of this subsection, the term “portfolio interest” shall not include any interest which is treated as not being portfolio interest under the rules of section 871(h)(4).
In the case of any portfolio interest received by a controlled foreign corporation, the following provisions shall not apply:
Subparagraph (A) of section 954(b)(3) (relating to exception where foreign base company income is less than 5 percent or $1,000,000).
Paragraph (4) of section 954(b) (relating to exception for certain income subject to high foreign taxes).
Clause (i) of section 954(c)(3)(A) (relating to certain income received from related persons).
For purposes of this subsection, the term “controlled foreign corporation” has the meaning given to such term by section 957(a).
Under rules similar to the rules of section 871(h)(6), the Secretary may provide that this subsection shall not apply to payments of interest described in section 871(h)(6).
For purposes of this subsection, the term “registered form” has the meaning given such term by section 163(f).
No tax shall be imposed under paragraph (1) or (3) of subsection (a) on any amount described in section 871(i)(2).
Except as provided in subparagraph (B), no tax shall be imposed under paragraph (1) of subsection (a) on any interest-related dividend (as defined in section 871(k)(1)) received from a regulated investment company.
Subparagraph (A) shall not apply—
to any dividend referred to in section 871(k)(1)(B), and
to any interest-related dividend received by a controlled foreign corporation (within the meaning of section 957(a)) to the extent such dividend is attributable to interest received by the regulated investment company from a person who is a related person (within the meaning of section 864(d)(4)) with respect to such controlled foreign corporation.
The rules of subsection (c)(5)(A) shall apply to any interest-related dividend received by a controlled foreign corporation (within the meaning of section 957(a)) to the extent such dividend is attributable to interest received by the regulated investment company which is described in clause (ii) of section 871(k)(1)(E) (and not described in clause (i) or (iii) of such section).
No tax shall be imposed under paragraph (1) of subsection (a) on any short-term capital gain dividend (as defined in section 871(k)(2)) received from a regulated investment company.
For doubling of tax on corporations of certain foreign countries, see section 891.
For special rules for original issue discount, see section 871(g).
Treasury Regulations
- Treas. Reg. §Treas. Reg. §1.881-0 Table of contents
- Treas. Reg. §Treas. Reg. §1.881-0(a) Scope.
- Treas. Reg. §Treas. Reg. §1.881-0(b) Recordkeeping requirements.
- Treas. Reg. §Treas. Reg. §1.881-0(c) Records to be maintained.
- Treas. Reg. §Treas. Reg. §1.881-0(d) Effective date.
- Treas. Reg. §Treas. Reg. §1.881-0(e) Examples.
- Treas. Reg. §Treas. Reg. §1.881-0(f) Effective date.
- Treas. Reg. §Treas. Reg. §1.881-0(i) In general.
- Treas. Reg. §Treas. Reg. §1.881-0(v) Related.
- Treas. Reg. §Treas. Reg. §1.881-1 Manner of taxing foreign corporations
- Treas. Reg. §Treas. Reg. §1.881-1(a) Classes of foreign corporations.
- Treas. Reg. §Treas. Reg. §1.881-1(b) Manner of taxing—(1) Foreign corporations not engaged in U.
- Treas. Reg. §Treas. Reg. §1.881-1(c) Meaning of terms.
- Treas. Reg. §Treas. Reg. §1.881-1(d) Rules applicable to foreign insurance companies—(1) Corporations qualifying under subchapter L.
- Treas. Reg. §Treas. Reg. §1.881-1(e) Other provisions applicable to foreign corporations—(1) Accumulated earnings tax.
- Treas. Reg. §Treas. Reg. §1.881-1(f) Effective/applicability date.
- Treas. Reg. §Treas. Reg. §1.881-1(i) Under section 881(a) and § 1.
- Treas. Reg. §Treas. Reg. §1.881-2 Taxation of foreign corporations not engaged in U.S. business
- Treas. Reg. §Treas. Reg. §1.881-2(a) Imposition of tax.
- Treas. Reg. §Treas. Reg. §1.881-2(b) Fixed or determinable annual or periodical income—(1) General rule.
- Treas. Reg. §Treas. Reg. §1.881-2(c) Other income and gains—(1) Items subject to tax.
- Treas. Reg. §Treas. Reg. §1.881-2(d) Credits against tax.
- Treas. Reg. §Treas. Reg. §1.881-2(e) Effective/applicability date.
- Treas. Reg. §Treas. Reg. §1.881-2(i) §1.881-2(i)
- Treas. Reg. §Treas. Reg. §1.881-3 Conduit financing arrangements
32 Citing Cases
§ 1366(a) (providing that an S corporation shareholder shall take into account his pro rata share of, among other things, the corporation’s loss for the tax year).13 Even if we assume that HCM was entitled to claim a deduction for the asset seizures (a question we need not decide here), Mr.
- 64 - [*64] In the notice respondent determined that the amounts reported as Reserve's program service revenue were taxable as FDAP income from sources within the United States and were subject to the 30% withholding tax pursuant to section 881.
- 2 - liable under section 1461 for his failure to withhold tax due under section 881, as required by section 1442, on payments made by such limited partnerships to A-Alphatronics Hong Kong Limited (A-Alpha), a Hong Kong corporation, for research and development services, to the extent that such payments were U.S.
s, such items are effectively connected income. Additionally, respondent argues that, if the income from U.S. certificates of deposit and bank deposits is determined not to be effectively connected income, a tax of 30 percent is imposed pursuant to section 881. - 141 - We have held, supra pp. 106-107, that LTD's income from U.S. certificates of deposit and bank deposits is characterized as compensation for personal services and is treated as income from sources within the United States. Accordin
s, such items are effectively connected income. Additionally, respondent argues that, if the income from U.S. certificates of deposit and bank deposits is determined not to be effectively connected income, a tax of 30 percent is imposed pursuant to section 881. - 141 - We have held, supra pp. 106-107, that LTD's income from U.S. certificates of deposit and bank deposits is characterized as compensation for personal services and is treated as income from sources within the United States. Accordin
taxation ofthe income ofa foreign corporation" ifeither: (1) under section 881 that income is "received from sources within the United States" (i.e., is "U.S.-source income"), sec.
tax purposes because (i) Epsolon was a foreign corporation not subject to tax under section 881 -36- [*36] or 8828 at the time ofthe gain and (ii) Sligo was not required to include its share ofEpsolon's gain under section 951 because Epsolon was a CFC for less than 30 days when it elected partnership status.
source fixed or determinable, annual or periodical income under section 881, or income that is effectively connected with a U.S.
source fixed or determinable, annual or periodical income under section 881, or income that is effectively connected with a U.S.
entity to a foreign corporation is generally subject to 30% - 17 - [*17] tax under section 881 and withholding under section 1442, but portfolio interest is exempt from U.S.
entity to a foreign corporation is generally subject to 30% - 17 - [*17] tax under section 881 and withholding under section 1442, but portfolio interest is exempt from U.S.
- 15 - on the last day of the foreign corporation's taxable year and subject to tax under section 881(a) (the excess interest tax). The controversy here concerns the excess interest provisions. The excess interest tax ties in with the withholding provisions of section 884(f)(1)(A). The withholding on interest paid to foreign persons or e
The amount derived is not necessarily equivalent to the amount of interest actually paid or accrued. Instead, the deductible amount of interest pursuant to sec. 1.882-5, Income Tax Regs., is an amount prescribed to achieve parity. If petitioner had made that election, it would have been binding for all years, and petitioner would then hav
the royalties paid to P by SDI USA did not retain their U.S. source character as part of the royalties paid by P to SDI Bermuda. Consequently, they were not income "received from sources within the United States by" SDI Bermuda within the meaning of sec. 881 (a), I.R.C., so as to subject P to withholding tax as provided in secs. 1441(a) and 1442(a), I.R.C. Arthur D. Pasternak, Douglas R. Cox, and Jeffrey A. Fiarman, for petitioner. Karen E. Chandler and Kristine A. Roth, for respondent. OPINION
d conditions as may be provided by regulations prescribed by the Secretary, subsection (a) shall not apply in the case of a foreign corporation engaged in trade or business within the United States if the Secretary determines that the requirements of subsection (a) impose an undue administrative burden and that the collection of the tax imposed by section 881 on such corporation will not be jeopardized by the exemption.