§909 — Suspension of taxes and credits until related income taken into account
1 citing cases
Statute Text — 26 U.S.C. §909
If there is a foreign tax credit splitting event with respect to a foreign income tax paid or accrued by the taxpayer, such tax shall not be taken into account for purposes of this title before the taxable year in which the related income is taken into account under this chapter by the taxpayer.
If there is a foreign tax credit splitting event with respect to a foreign income tax paid or accrued by a specified 10-percent owned foreign corporation (as defined in section 245A(b) without regard to paragraph (2) thereof), such tax shall not be taken into account—
for purposes of section 960, or
for purposes of determining earnings and profits under section 964(a),
before the taxable year in which the related income is taken into account under this chapter by such specified 10-percent owned foreign corporation or a domestic corporation which is a United States shareholder with respect to such specified 10-percent owned foreign corporation.
For purposes of this section—
In the case of any foreign income tax not taken into account by reason of subsection (a) or (b), except as otherwise provided by the Secretary, such tax shall be so taken into account in the taxable year referred to in such subsection (other than for purposes of section 986(a)) as a foreign income tax paid or accrued in such taxable year.
In the case of a partnership, subsections (a) and (b) shall be applied at the partner level. Except as otherwise provided by the Secretary, a rule similar to the rule of the preceding sentence shall apply in the case of any S corporation or trust.
For purposes of this section—
There is a foreign tax credit splitting event with respect to a foreign income tax if the related income is (or will be) taken into account under this chapter by a covered person.
The term “foreign income tax” means any income, war profits, or excess profits tax paid or accrued to any foreign country or to any possession of the United States.
The term “related income” means, with respect to any portion of any foreign income tax, the income (or, as appropriate, earnings and profits) to which such portion of foreign income tax relates.
The term “covered person” means, with respect to any person who pays or accrues a foreign income tax (hereafter in this paragraph referred to as the “payor”)—
any entity in which the payor holds, directly or indirectly, at least a 10 percent ownership interest (determined by vote or value),
any person which holds, directly or indirectly, at least a 10 percent ownership interest (determined by vote or value) in the payor,
any person which bears a relationship to the payor described in section 267(b) or 707(b), and
any other person specified by the Secretary for purposes of this paragraph.
The Secretary may issue such regulations or other guidance as is necessary or appropriate to carry out the purposes of this section, including regulations or other guidance which provides—
appropriate exceptions from the provisions of this section, and
for the proper application of this section with respect to hybrid instruments.
Treasury Regulations
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Treas. Reg. §1.909-0Outline of regulation provisions for section 909
This section lists the headings for §§ 1.909-1 through 1.909-6.
(a) Definitions.
(b) Taxes paid or accrued by a partnership, S corporation or trust.
(c) Related income of a partnership, S corporation or trust.
(d) Application of section 909 to pre-1987 accumulated profits and pre-1987 foreign income taxes.
(e) Effective/applicability date.
(a) Foreign tax credit splitting event.
(1) In general.
(2) Split taxes not taken into account.
(b) Splitter arrangements.
(1) Reverse hybrid splitter arrangements.
(i) In general.
(ii) Split taxes from a reverse hybrid splitter arrangement.
(iii) Related income from a reverse hybrid splitter arrangement.
(iv) Reverse hybrid.
(v) Examples.
(2) Loss-sharing splitter arrangements.
(i) In general.
(ii) U.S. combined income group.
(iii) Income and shared loss of a U.S. combined income group.
(iv) Split taxes from a loss-sharing splitter arrangement.
(v) Related income from a loss-sharing splitter arrangement.
(vi) Foreign group relief or other loss-sharing regime.
(vii) Examples.
(3) Hybrid instrument splitter arrangements.
(i) U.S. equity hybrid instrument splitter arrangement.
(ii) U.S. debt hybrid instrument splitter arrangement.
(4) Partnership inter-branch payment splitter arrangements.
(i) In general.
(ii) Split taxes from a partnership inter-branch payment splitter arrangement.
(iii) Related income from a partnership inter-branch payment splitter arrangement.
(c) Effective/applicability date.
(a) Interim rules for identifying related income and split taxes.
(b) Split taxes on deductible disregarded payments.
(c) Effective/applicability date.
(a) Interim rules.
(b) Effective/applicability date.
(a) Taxes paid or accrued in taxable years beginning in 2011.
(b) Taxes paid or accrued in certain taxable years beginning in 2012 with respect to a foreign consolidated group splitter arrangement.
(c) Effective/applicability date.
(a) Foreign tax credit splitting event.
(1) In general.
(2) Taxes not subject to suspension under section 909.
(3) Taxes subject to suspension under section 909.
(b) Pre-2011 splitter arrangements.
(1) Reverse hybrid structure splitter arrangements.
(2) Foreign consolidated group splitter arrangements.
(3) Group relief or other loss-sharing regime splitter arrangements.
(i) In general.
(ii) Split taxes and related income.
(4) Hybrid instrument splitter arrangements.
(i) In general.
(ii) U.S. equity hybrid instrument splitter arrangement.
(iii) U.S. debt hybrid instrument splitter arrangement.
(c) General rules for applying section 909 to pre-2011 split taxes and related income.
(1) Annual determination.
(2) Separate categories.
(d) Special rules regarding related income.
(1) Annual adjustments.
(2) Effect of separate limitation losses and deficits.
(3) Pro rata method for distributions out of earnings and profits that include both related income and other income.
(4) Alternative method for distributions out of earnings and profits that include both related income and other income.
(5) Distributions, deemed distributions, and inclusions out of related income.
(6) Carryover of related income.
(7) Related income taken into account by a section 902 shareholder.
(8) Related income taken into account by a payor section 902 corporation.
(9) Related income taken into account by an affiliated group of corporations that includes a section 902 shareholder.
(10) Distributions of previously-taxed earnings and profits.
(e) Special rules regarding pre-2011 split taxes.
(1) Taxes deemed paid pro rata out of pre-2011 split taxes and other taxes.
(2) Pre-2011 split taxes deemed paid in pre-2011 taxable years.
(3) Carryover of pre-2011 split taxes.
(4) Determining when pre-2011 split taxes are no longer treated as pre-2011 split taxes.
(f) Rules relating to partnerships and trusts.
(1) Taxes paid or accrued by partnerships.
(2) Section 704(b) allocations.
(3) Trusts.
(g) Interaction between section 909 and other Code provisions.
(1) Section 904(c).
(2) Section 905(a).
(3) Section 905(c).
(4) Other foreign tax credit provisions.
(h) Effective/applicability date.
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Treas. Reg. §1.909-0(a)Foreign tax credit splitting event.
Foreign tax credit splitting event.
(1) In general.
(2) Taxes not subject to suspension under section 909.
(3) Taxes subject to suspension under section 909.
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Treas. Reg. §1.909-0(b)Pre-2011 splitter arrangements.
Pre-2011 splitter arrangements.
(1) Reverse hybrid structure splitter arrangements.
(2) Foreign consolidated group splitter arrangements.
(3) Group relief or other loss-sharing regime splitter arrangements.
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Treas. Reg. §1.909-0(c)General rules for applying section 909 to pre-2011 split taxes and related income.
General rules for applying section 909 to pre-2011 split taxes and related income.
(1) Annual determination.
(2) Separate categories.
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Treas. Reg. §1.909-0(d)Special rules regarding related income.
Special rules regarding related income.
(1) Annual adjustments.
(2) Effect of separate limitation losses and deficits.
(3) Pro rata method for distributions out of earnings and profits that include both related income and other income.
(4) Alternative method for distributions out of earnings and profits that include both related income and other income.
(5) Distributions, deemed distributions, and inclusions out of related income.
(6) Carryover of related income.
(7) Related income taken into account by a section 902 shareholder.
(8) Related income taken into account by a payor section 902 corporation.
(9) Related income taken into account by an affiliated group of corporations that includes a section 902 shareholder.
(10) Distributions of previously-taxed earnings and profits.
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Treas. Reg. §1.909-0(e)Special rules regarding pre-2011 split taxes.
Special rules regarding pre-2011 split taxes.
(1) Taxes deemed paid pro rata out of pre-2011 split taxes and other taxes.
(2) Pre-2011 split taxes deemed paid in pre-2011 taxable years.
(3) Carryover of pre-2011 split taxes.
(4) Determining when pre-2011 split taxes are no longer treated as pre-2011 split taxes.
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Treas. Reg. §1.909-0(f)Rules relating to partnerships and trusts.
Rules relating to partnerships and trusts.
(1) Taxes paid or accrued by partnerships.
(2) Section 704(b) allocations.
(3) Trusts.
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Treas. Reg. §1.909-0(g)Interaction between section 909 and other Code provisions.
Interaction between section 909 and other Code provisions.
(1) Section 904(c).
(2) Section 905(a).
(3) Section 905(c).
(4) Other foreign tax credit provisions.
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Treas. Reg. §1.909-0(h)Effective/applicability date.
Effective/applicability date.
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Treas. Reg. §1.909-0(i)In general.
In general.
(ii) U.S. equity hybrid instrument splitter arrangement.
(iii) U.S. debt hybrid instrument splitter arrangement.
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Treas. Reg. §1.909-0(v)Related income from a loss-sharing splitter arrangement.
Related income from a loss-sharing splitter arrangement.
(vi) Foreign group relief or other loss-sharing regime.
(vii) Examples.
(3) Hybrid instrument splitter arrangements.
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Treas. Reg. §1.909-1Definitions and special rules
(a) Definitions. For purposes of section 909, this section, and §§ 1.909-2 through 1.909-5, the following definitions apply:
(1) The term section 902 corporation means any foreign corporation with respect to which one or more domestic corporations meet the ownership requirements of section 902(a) or (b).
(2) The term section 902 shareholder means any domestic corporation that meets the ownership requirements of section 902(a) or (b) with respect to a section 902 corporation.
(3) The term payor means a person that pays or accrues a foreign income tax within the meaning of § 1.901-2(f), and also includes a person that takes foreign income taxes paid or accrued by a partnership, S corporation, estate or trust into account pursuant to section 702(a)(6), section 901(b)(5) or section 1373(a).
(4) The term covered person means, with respect to a payor—
(i) Any entity in which the payor holds, directly or indirectly, at least a 10 percent ownership interest (determined by vote or value);
(ii) Any person that holds, directly or indirectly, at least a 10 percent ownership interest (determined by vote or value) in the payor; or
(iii) Any person that bears a relationship that is described in section 267(b) or 707(b) to the payor.
(5) The term foreign income tax means any income, war profits, or excess profits tax paid or accrued to any foreign country or to any possession of the United States. A foreign income tax includes any tax paid or accrued in lieu of such a tax within the meaning of section 903.
(6) The term post-1986 foreign income taxes has the meaning provided in § 1.902-1(a)(8).
(7) The term post-1986 undistributed earnings has the meaning provided in § 1.902-1(a)(9).
(8) The term disregarded entity means an entity that is disregarded as an entity separate from its owner, as provided in § 301.7701-2(c)(2)(i) of this chapter.
(9) The term hybrid partnership means a partnership that is subject to income tax in a foreign country as a corporation (or otherwise at the entity level) on the basis of residence, place of incorporation, place of management or similar criteria.
(b) Taxes paid or accrued by a partnership, S corporation or trust. Under section 909(c)(1), section 909 applies at the partner level, and similar rules apply in the case of an S corporation or trust. Accordingly, in the case of foreign income taxes paid or accrued by a partnership, S corporation or trust, taxes allocated to one or more partners, shareholders or beneficiaries (as the case may be) will be treated as split taxes to the extent such taxes would be split taxes if the partner, shareholder or beneficiary had paid or accrued the taxes directly on the date such taxes are taken into account by the partner under sections 702 and 706(a), by the shareholder under section 1373(a), or by the beneficiary under section 901(b)(5). Any such split taxes will be suspended in the hands of the partner, shareholder or beneficiary.
(c) Related income of a partnership, S corporation or trust. For purposes of determining whether related income is taken into account by a covered person, related income of a partnership, S corporation or trust is considered to be taken into account by the partner, shareholder or beneficiary to whom the related income is allocated.
(d) Application of section 909 to pre-1987 accumulated profits and pre-1987 foreign income taxes. Section 909 and §§ 1.909-1 through 1.909-5 will apply to pre-1987 accumulated profits (as defined in § 1.902-1(a)(10)(i)) and pre-1987 foreign income taxes (as defined in § 1.902-1(a)(10)(iii)) of a section 902 corporation attributable to taxable years beginning on or after January 1, 2012.
(e) Effective/applicability date. This section applies to taxable years ending after February 9, 2015. See 26 CFR 1.909-1T (revised as of April 1, 2014) for rules applicable to taxable years beginning on or after January 1, 2011, and ending on or before February 9, 2015.
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Treas. Reg. §1.909-1(a)Definitions.
Definitions. For purposes of section 909, this section, and §§ 1.909-2 through 1.909-5, the following definitions apply:
(1) The term section 902 corporation means any foreign corporation with respect to which one or more domestic corporations meet the ownership requirements of section 902(a) or (b).
(2) The term section 902 shareholder means any domestic corporation that meets the ownership requirements of section 902(a) or (b) with respect to a section 902 corporation.
(3) The term payor means a person that pays or accrues a foreign income tax within the meaning of § 1.901-2(f), and also includes a person that takes foreign income taxes paid or accrued by a partnership, S corporation, estate or trust into account pursuant to section 702(a)(6), section 901(b)(5) or section 1373(a).
(4) The term covered person means, with respect to a payor—
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Treas. Reg. §1.909-1(b)Taxes paid or accrued by a partnership, S corporation or trust.
Taxes paid or accrued by a partnership, S corporation or trust. Under section 909(c)(1), section 909 applies at the partner level, and similar rules apply in the case of an S corporation or trust. Accordingly, in the case of foreign income taxes paid or accrued by a partnership, S corporation or trust, taxes allocated to one or more partners, shareholders or beneficiaries (as the case may be) will be treated as split taxes to the extent such taxes would be split taxes if the partner, shareholder or beneficiary had paid or accrued the taxes directly on the date such taxes are taken into account by the partner under sections 702 and 706(a), by the shareholder under section 1373(a), or by the beneficiary under section 901(b)(5). Any such split taxes will be suspended in the hands of the partner, shareholder or beneficiary.
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Treas. Reg. §1.909-1(c)Related income of a partnership, S corporation or trust.
Related income of a partnership, S corporation or trust. For purposes of determining whether related income is taken into account by a covered person, related income of a partnership, S corporation or trust is considered to be taken into account by the partner, shareholder or beneficiary to whom the related income is allocated.
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Treas. Reg. §1.909-1(d)Application of section 909 to pre-1987 accumulated profits and pre-1987 foreign income taxes.
Application of section 909 to pre-1987 accumulated profits and pre-1987 foreign income taxes. Section 909 and §§ 1.909-1 through 1.909-5 will apply to pre-1987 accumulated profits (as defined in § 1.902-1(a)(10)(i)) and pre-1987 foreign income taxes (as defined in § 1.902-1(a)(10)(iii)) of a section 902 corporation attributable to taxable years beginning on or after January 1, 2012.
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Treas. Reg. §1.909-1(e)Effective/applicability date.
Effective/applicability date. This section applies to taxable years ending after February 9, 2015. See 26 CFR 1.909-1T (revised as of April 1, 2014) for rules applicable to taxable years beginning on or after January 1, 2011, and ending on or before February 9, 2015.
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Treas. Reg. §1.909-1(i)§1.909-1(i)
Any entity in which the payor holds, directly or indirectly, at least a 10 percent ownership interest (determined by vote or value);
(ii) Any person that holds, directly or indirectly, at least a 10 percent ownership interest (determined by vote or value) in the payor; or
(iii) Any person that bears a relationship that is described in section 267(b) or 707(b) to the payor.
(5) The term foreign income tax means any income, war profits, or excess profits tax paid or accrued to any foreign country or to any possession of the United States. A foreign income tax includes any tax paid or accrued in lieu of such a tax within the meaning of section 903.
(6) The term post-1986 foreign income taxes has the meaning provided in § 1.902-1(a)(8).
(7) The term post-1986 undistributed earnings has the meaning provided in § 1.902-1(a)(9).
(8) The term disregarded entity means an entity that is disregarded as an entity separate from its owner, as provided in § 301.7701-2(c)(2)(i) of this chapter.
(9) The term hybrid partnership means a partnership that is subject to income tax in a foreign country as a corporation (or otherwise at the entity level) on the basis of residence, place of incorporation, place of management or similar criteria.
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Treas. Reg. §1.909-2Splitter arrangements
(a) Foreign tax credit splitting event—(1) In general. There is a foreign tax credit splitting event with respect to foreign income taxes paid or accrued if and only if, in connection with an arrangement described in paragraph (b) of this section (a splitter arrangement) the related income was, is or will be taken into account for U.S. Federal income tax purposes by a person that is a covered person with respect to the payor of the tax. Foreign income taxes that are paid or accrued in connection with a splitter arrangement are split taxes to the extent provided in paragraph (b) of this section. Income (or, as appropriate, earnings and profits) that was, is or will be taken into account by a covered person in connection with a splitter arrangement is related income to the extent provided in paragraph (b) of this section.
(2) Split taxes not taken into account. Split taxes will not be taken into account for U.S. Federal income tax purposes before the taxable year in which the related income is taken into account by the payor or, in the case of split taxes paid or accrued by a section 902 corporation, by a section 902 shareholder of such section 902 corporation. Therefore, in the case of split taxes paid or accrued by a section 902 corporation, split taxes will not be taken into account for purposes of sections 902 or 960, or for purposes of determining earnings and profits under section 964(a), before the taxable year in which the related income is taken into account by the payor section 902 corporation, a section 902 shareholder of the section 902 corporation, or a member of the section 902 shareholder's consolidated group. See § 1.909-3(a) for rules relating to when split taxes and related income are taken into account.
(b) Splitter arrangements. The arrangements set forth in this paragraph (b) are splitter arrangements.
(1) Reverse hybrid splitter arrangements—(i) In general. A reverse hybrid is a splitter arrangement when a payor pays or accrues foreign income taxes with respect to income of a reverse hybrid. A reverse hybrid splitter arrangement exists even if the reverse hybrid has a loss or a deficit in earnings and profits for a particular year for U.S. Federal income tax purposes (for example, due to a timing difference).
(ii) Split taxes from a reverse hybrid splitter arrangement. The foreign income taxes paid or accrued with respect to income of the reverse hybrid are split taxes.
(iii) Related income from a reverse hybrid splitter arrangement. The related income with respect to split taxes from a reverse hybrid splitter arrangement is the earnings and profits (computed for U.S. Federal income tax purposes) of the reverse hybrid attributable to the activities of the reverse hybrid that gave rise to income included in the payor's foreign tax base with respect to which the split taxes were paid or accrued. Accordingly, related income of the reverse hybrid includes items of income or expense attributable to a disregarded entity owned by the reverse hybrid only to the extent that the income attributable to the activities of the disregarded entity is included in the payor's foreign tax base.
(iv) Reverse hybrid. The term reverse hybrid means an entity that is a corporation for U.S. Federal income tax purposes but is a fiscally transparent entity (under the principles of § 1.894-1(d)(3)) or a branch under the laws of a foreign country imposing tax on the income of the entity.
(v) Examples. The following examples illustrate the rules of paragraph (b)(1) of this section.
(2) Loss-sharing splitter arrangements—(i) In general. A foreign group relief or other loss-sharing regime is a loss-sharing splitter arrangement to the extent that a shared loss of a U.S. combined income group could have been used to offset income of that group in the current or in a prior foreign taxable year (usable shared loss) but is used instead to offset income of another U.S. combined income group.
(ii) U.S. combined income group. The term U.S. combined income group means an individual or a corporation and all entities (including entities that are fiscally transparent for U.S. Federal income tax purposes under the principles of § 1.894-1(d)(3)) that for U.S. Federal income tax purposes combine any of their respective items of income, deduction, gain or loss with the income, deduction, gain or loss of such individual or corporation. A U.S. combined income group can arise, for example, as a result of an entity being disregarded or, in the case of a partnership or hybrid partnership and a partner, as a result of the allocation of income or any other item of the partnership to the partner. For purposes of this paragraph (b)(2)(ii), a branch is treated as an entity, all members of a U.S. affiliated group of corporations (as defined in section 1504) that file a consolidated return are treated as a single corporation, and two or more individuals that file a joint return are treated as a single individual. A U.S. combined income group may consist of a single individual or corporation and no other entities, but cannot include more than one individual or corporation. In addition, an entity may belong to more than one U.S. combined income group. For example, a hybrid partnership with two corporate partners that do not combine any of their items of income, deduction, gain or loss for U.S. Federal income tax purposes is in a separate U.S. combined income group with each of its partners.
(iii) Income and shared loss of a U.S. combined income group—(A) Income. Except as otherwise provided in this paragraph (b)(2)(iii)(A), the income of a U.S. combined income group is the aggregate amount of taxable income recognized or taken into account for foreign tax purposes by those members that have positive taxable income for foreign tax purposes. In the case of an entity that is fiscally transparent (under the principles of § 1.894-1(d)(3)) for foreign tax purposes and that is a member of more than one U.S. combined income group, the foreign taxable income of the entity is allocated between or among the groups under foreign tax law. In the case of an entity that is not fiscally transparent for foreign tax purposes and that is a member of more than one U.S. combined income group, the foreign taxable income of the entity is allocated between or among those groups based on U.S. Federal income tax principles. For example, in the case of a hybrid partnership, the foreign taxable income of the partnership is allocated between or among the groups in the manner the partnership allocates the income under section 704(b). To the extent the foreign taxable income would be income under U.S. Federal income tax principles in another year, the income is allocated between or among the groups based on how the hybrid partnership would allocate the income if the income were recognized for U.S. Federal income tax purposes in the year in which the income is recognized for foreign tax purposes. To the extent the foreign taxable income would not constitute income under U.S. Federal income tax principles in any year, the income is allocated between or among the groups in the same manner as the partnership items attributable to the activity giving rise to the foreign taxable income.
(B) Shared loss. The term shared loss means a loss of one entity for foreign tax purposes that, in connection with a foreign group relief or other loss-sharing regime, is taken into account by one or more other entities. Except as otherwise provided in this paragraph (b)(2)(iii)(B), the amount of shared loss of a U.S. combined income group is the sum of the shared losses of all members of the U.S. combined income group. In the case of an entity that is fiscally transparent (under the principles of § 1.894-1(d)(3)) for foreign tax purposes and that is a member of more than one U.S. combined income group, the shared loss of the entity is allocated between or among the groups under foreign tax law. In the case of an entity that is not fiscally transparent for foreign tax purposes and that is a member of more than one U.S. combined income group, the shared loss of the entity will be allocated between or among those groups based on U.S. Federal income tax principles. For example, in the case of a hybrid partnership, the shared loss of the partnership will be allocated between or among the groups in the manner the partnership allocates the loss under section 704(b). To the extent the shared loss would be a loss under U.S. Federal income tax principles in another year, the loss is allocated between or among the groups based on how the partnership would allocate the loss if the loss were recognized for U.S. Federal income tax purposes in the year in which the loss is recognized for foreign tax purposes. To the extent the shared loss would not constitute a loss under U.S. Federal income tax principles in any year, the loss is allocated between or among the groups in the same manner as the partnership items attributable to the activity giving rise to the shared loss.
(iv) Split taxes from a loss-sharing splitter arrangement. Split taxes from a loss-sharing splitter arrangement are foreign income taxes paid or accrued by a member of the U.S. combined income group with respect to income from the current foreign taxable year, or, in the case of a foregone carryback loss, from the prior foreign taxable year, equal to the amount of the usable shared loss of that group that offsets income of another U.S. combined income group.
(v) Related income from a loss-sharing splitter arrangement. The related income with respect to split taxes from a loss-sharing splitter arrangement is an amount of income of the individual or corporate member of the U.S. combined income group equal to the amount of income under foreign tax law of that U.S. combined income group that is offset by the usable shared loss of another U.S. combined income group.
(vi) Foreign group relief or other loss-sharing regime. A foreign group relief or other loss-sharing regime exists when an entity may surrender its loss to offset the income of one or more other entities. A foreign group relief or other loss-sharing regime does not include an allocation of loss of an entity that is a partnership or other fiscally transparent entity (under the principles of § 1.894-1(d)(3)) for foreign tax purposes or regimes in which foreign tax is imposed on combined income (such as a foreign consolidated regime), as described in § 1.901-2(f)(3).
(vii) Examples. The following examples illustrate the rules of paragraph (b)(2) of this section.
(3) Hybrid instrument splitter arrangements—(i) U.S. equity hybrid instrument splitter arrangement—(A) In general. A U.S. equity hybrid instrument is a splitter arrangement if:
(1) Under the laws of a foreign jurisdiction in which the instrument owner is subject to tax, the instrument gives rise to income includible in the instrument owner's income and such inclusion results in foreign income taxes paid or accrued by the instrument owner;
(2) Under the laws of a foreign jurisdiction in which the issuer is subject to tax, the instrument gives rise to deductions that are incurred or otherwise taken into account by the issuer; and
(3) The events that give rise to income includible in the instrument owner's income for foreign tax purposes as described in paragraph (b)(3)(i)(A)(1) of this section, and to deductions for the issuer for foreign tax purposes as described in paragraph (b)(3)(i)(A)(2) of this section, do not result in an inclusion of income for the instrument owner for U.S. federal income tax purposes.
(B) Split taxes from a U.S. equity hybrid instrument splitter arrangement. Split taxes from a U.S. equity hybrid instrument splitter arrangement equal the total amount of foreign income taxes paid or accrued by the owner of the hybrid instrument less the amount of foreign income taxes that would have been paid or accrued had the owner of the U.S. equity hybrid instrument not been subject to foreign tax on income from the instrument with respect to the events described in § 1.909-2(b)(3)(i)(A).
(C) Related income from a U.S. equity hybrid instrument splitter arrangement. The related income with respect to split taxes from a U.S. equity hybrid instrument splitter arrangement is income of the issuer of the U.S. equity hybrid instrument in an amount equal to the amounts giving rise to the split taxes that are deductible by the issuer for foreign tax purposes, determined without regard to the actual amount of the issuer's income or earnings and profits for U.S. Federal income tax purposes.
(D) U.S. equity hybrid instrument. The term U.S. equity hybrid instrument means an instrument that is treated as equity for U.S. Federal income tax purposes but for foreign income tax purposes either is treated as indebtedness or otherwise entitles the issuer to a deduction with respect to such instrument.
(E) Example—(i) Facts. USP, a domestic corporation, wholly owns CFC1, which wholly owns CFC2. Both CFC1 and CFC2 are corporations organized in country A. CFC2 issues an instrument to CFC1 that is treated as indebtedness for country A tax purposes but equity for U.S. Federal income tax purposes. Under country A's income tax laws, the instrument accrues interest at the end of each month, which results in a deduction for CFC2 and an income inclusion and tax liability for CFC1 in country A. The accrual of interest does not result in an inclusion of income for CFC1 for U.S. Federal income tax purposes. Pursuant to the terms of the instrument, CFC2 makes a distribution at the end of the year equal to the amounts of interest that have accrued during the year, and such payment is treated as a dividend that is included in the income of CFC1 for U.S. Federal income tax purposes.
(ii) Result. Pursuant to § 1.909-2(b)(3)(i)(D), because the instrument is treated as equity for U.S. Federal income tax purposes but is treated as indebtedness for country A tax purposes, it is a U.S. equity hybrid instrument. Pursuant to § 1.909-2(b)(3)(i)(A)(3), because the accrual of interest under foreign law does not result in an inclusion of income of CFC1 for U.S. Federal income tax purposes, there is a splitter arrangement. The fact that the payment of the accrued amount at the end of the year pursuant to the terms of the instrument gives rise to a dividend that is included in income of CFC1 for U.S. Federal income tax purposes does not change the result because it is the accrual of interest and not the payment that gives rise to income or deductions under foreign law. The payments will be treated as a distribution of related income to the extent provided by § 1.909-3 and § 1.909-6(d).
(ii) U.S. debt hybrid instrument splitter arrangement—(A) In general. A U.S. debt hybrid instrument is a splitter arrangement if foreign income taxes are paid or accrued by the issuer of a U.S. debt hybrid instrument with respect to income in an amount equal to the interest (including original issue discount) paid or accrued on the instrument that is deductible for U.S. Federal income tax purposes but that does not give rise to a deduction under the laws of a foreign jurisdiction in which the issuer is subject to tax.
(B) Split taxes from a U.S. debt hybrid instrument splitter arrangement. Split taxes from a U.S. debt hybrid instrument splitter arrangement are the foreign income taxes paid or accrued by the issuer on the income that would have been offset by the interest paid or accrued on the U.S. debt hybrid instrument had such interest been deductible for foreign tax purposes.
(C) Related income from a U.S. debt hybrid instrument splitter arrangement. The related income from a U.S. debt hybrid instrument splitter arrangement is the gross amount of the interest income recognized for U.S. Federal income tax purposes by the owner of the U.S. debt hybrid instrument, determined without regard to the actual amount of the owner's income or earnings and profits for U.S. Federal income tax purposes.
(D) U.S. debt hybrid instrument. The term U.S. debt hybrid instrument means an instrument that is treated as equity for foreign tax purposes but as indebtedness for U.S. Federal income tax purposes.
(4) Partnership inter-branch payment splitter arrangements—(i) In general. An allocation of foreign income tax paid or accrued by a partnership with respect to an inter-branch payment as described in § 1.704-1(b)(4)(viii)(d)(3) (revised as of April 1, 2011) (the inter-branch payment tax) is a splitter arrangement to the extent the inter-branch payment tax is not allocated to the partners in the same proportion as the distributive shares of income in the CFTE category to which the inter-branch payment tax is or would be assigned under § 1.704-1(b)(4)(viii)(d) without regard to § 1.704-1(b)(4)(viii)(d)(3).
(ii) Split taxes from a partnership inter-branch payment splitter arrangement. The split taxes from a partnership inter-branch splitter arrangement equal the excess of the amount of the inter-branch payment tax allocated to a partner under the partnership agreement over the amount of the inter-branch payment tax that would have been allocated to the partner if the inter-branch payment tax had been allocated to the partners in the same proportion as the distributive shares of income in the CFTE category referred to in paragraph (b)(4)(i) of this section.
(iii) Related income from a partnership inter-branch payment splitter arrangement. The related income from a partnership inter-branch payment splitter arrangement equals the amount of income allocated to a partner that exceeds the amount of income that would have been allocated to the partner if income in the CFTE category referred to in paragraph (b)(4)(i) of this section in the amount of the inter-branch payment had been allocated to the partners in the same proportion as the inter-branch payment tax was allocated under the partnership agreement.
(c) Effective/applicability date. This section applies to foreign income taxes paid or accrued in taxable years ending after February 9, 2015. However, a taxpayer may choose to apply the provisions of § 1.909-2T (as contained in 26 CFR part 1, revised as of April 1, 2014) in lieu of this section to foreign income taxes paid or accrued in its first taxable year ending after February 9, 2015, and in taxable years of foreign corporations with respect to which the taxpayer is a domestic shareholder (as defined in § 1.902-1(a)) that end with or within that first taxable year. See 26 CFR 1.909-2T (revised as of April 1, 2014) for rules applicable to foreign income taxes paid or accrued in taxable years beginning on or after January 1, 2012, and ending on or before February 9, 2015.
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Treas. Reg. §1.909-2(a)Foreign tax credit splitting event—(1) In general.
Foreign tax credit splitting event—(1) In general. There is a foreign tax credit splitting event with respect to foreign income taxes paid or accrued if and only if, in connection with an arrangement described in paragraph (b) of this section (a splitter arrangement) the related income was, is or will be taken into account for U.S. Federal income tax purposes by a person that is a covered person with respect to the payor of the tax. Foreign income taxes that are paid or accrued in connection with a splitter arrangement are split taxes to the extent provided in paragraph (b) of this section. Income (or, as appropriate, earnings and profits) that was, is or will be taken into account by a covered person in connection with a splitter arrangement is related income to the extent provided in paragraph (b) of this section.
(2) Split taxes not taken into account. Split taxes will not be taken into account for U.S. Federal income tax purposes before the taxable year in which the related income is taken into account by the payor or, in the case of split taxes paid or accrued by a section 902 corporation, by a section 902 shareholder of such section 902 corporation. Therefore, in the case of split taxes paid or accrued by a section 902 corporation, split taxes will not be taken into account for purposes of sections 902 or 960, or for purposes of determining earnings and profits under section 964(a), before the taxable year in which the related income is taken into account by the payor section 902 corporation, a section 902 shareholder of the section 902 corporation, or a member of the section 902 shareholder's consolidated group. See § 1.909-3(a) for rules relating to when split taxes and related income are taken into account.
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Treas. Reg. §1.909-2(b)Splitter arrangements.
Splitter arrangements. The arrangements set forth in this paragraph (b) are splitter arrangements.
(1) Reverse hybrid splitter arrangements—(i) In general. A reverse hybrid is a splitter arrangement when a payor pays or accrues foreign income taxes with respect to income of a reverse hybrid. A reverse hybrid splitter arrangement exists even if the reverse hybrid has a loss or a deficit in earnings and profits for a particular year for U.S. Federal income tax purposes (for example, due to a timing difference).
(ii) Split taxes from a reverse hybrid splitter arrangement. The foreign income taxes paid or accrued with respect to income of the reverse hybrid are split taxes.
(iii) Related income from a reverse hybrid splitter arrangement. The related income with respect to split taxes from a reverse hybrid splitter arrangement is the earnings and profits (computed for U.S. Federal income tax purposes) of the reverse hybrid attributable to the activities of the reverse hybrid that gave rise to income included in the payor's foreign tax base with respect to which the split taxes were paid or accrued. Accordingly, related income of the reverse hybrid includes items of income or expense attributable to a disregarded entity owned by the reverse hybrid only to the extent that the income attributable to the activities of the disregarded entity is included in the payor's foreign tax base.
(iv) Reverse hybrid. The term reverse hybrid means an entity that is a corporation for U.S. Federal income tax purposes but is a fiscally transparent entity (under the principles of § 1.894-1(d)(3)) or a branch under the laws of a foreign country imposing tax on the income of the entity.
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Treas. Reg. §1.909-2(c)Effective/applicability date.
Effective/applicability date. This section applies to foreign income taxes paid or accrued in taxable years ending after February 9, 2015. However, a taxpayer may choose to apply the provisions of § 1.909-2T (as contained in 26 CFR part 1, revised as of April 1, 2014) in lieu of this section to foreign income taxes paid or accrued in its first taxable year ending after February 9, 2015, and in taxable years of foreign corporations with respect to which the taxpayer is a domestic shareholder (as defined in § 1.902-1(a)) that end with or within that first taxable year. See 26 CFR 1.909-2T (revised as of April 1, 2014) for rules applicable to foreign income taxes paid or accrued in taxable years beginning on or after January 1, 2012, and ending on or before February 9, 2015.
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Treas. Reg. §1.909-2(v)Related income from a loss-sharing splitter arrangement.
Related income from a loss-sharing splitter arrangement. The related income with respect to split taxes from a loss-sharing splitter arrangement is an amount of income of the individual or corporate member of the U.S. combined income group equal to the amount of income under foreign tax law of that U.S. combined income group that is offset by the usable shared loss of another U.S. combined income group.
(vi) Foreign group relief or other loss-sharing regime. A foreign group relief or other loss-sharing regime exists when an entity may surrender its loss to offset the income of one or more other entities. A foreign group relief or other loss-sharing regime does not include an allocation of loss of an entity that is a partnership or other fiscally transparent entity (under the principles of § 1.894-1(d)(3)) for foreign tax purposes or regimes in which foreign tax is imposed on combined income (such as a foreign consolidated regime), as described in § 1.901-2(f)(3).
(vii) Examples. The following examples illustrate the rules of paragraph (b)(2) of this section.
(3) Hybrid instrument splitter arrangements—(i) U.S. equity hybrid instrument splitter arrangement—(A) In general. A U.S. equity hybrid instrument is a splitter arrangement if:
(1) Under the laws of a foreign jurisdiction in which the instrument owner is subject to tax, the instrument gives rise to income includible in the instrument owner's income and such inclusion results in foreign income taxes paid or accrued by the instrument owner;
(2) Under the laws of a foreign jurisdiction in which the issuer is subject to tax, the instrument gives rise to deductions that are incurred or otherwise taken into account by the issuer; and
(3) The events that give rise to income includible in the instrument owner's income for foreign tax purposes as described in paragraph (b)(3)(i)(A)(1) of this section, and to deductions for the issuer for foreign tax purposes as described in paragraph (b)(3)(i)(A)(2) of this section, do not result in an inclusion of income for the instrument owner for U.S. federal income tax purposes.
(B) Split taxes from a U.S. equity hybrid instrument splitter arrangement. Split taxes from a U.S. equity hybrid instrument splitter arrangement equal the total amount of foreign income taxes paid or accrued by the owner of the hybrid instrument less the amount of foreign income taxes that would have been paid or accrued had the owner of the U.S. equity hybrid instrument not been subject to foreign tax on income from the instrument with respect to the events described in § 1.909-2(b)(3)(i)(A).
(C) Related income from a U.S. equity hybrid instrument splitter arrangement. The related income with respect to split taxes from a U.S. equity hybrid instrument splitter arrangement is income of the issuer of the U.S. equity hybrid instrument in an amount equal to the amounts giving rise to the split taxes that are deductible by the issuer for foreign tax purposes, determined without regard to the actual amount of the issuer's income or earnings and profits for U.S. Federal income tax purposes.
(D) U.S. equity hybrid instrument. The term U.S. equity hybrid instrument means an instrument that is treated as equity for U.S. Federal income tax purposes but for foreign income tax purposes either is treated as indebtedness or otherwise entitles the issuer to a deduction with respect to such instrument.
(E) Example—(i) Facts. USP, a domestic corporation, wholly owns CFC1, which wholly owns CFC2. Both CFC1 and CFC2 are corporations organized in country A. CFC2 issues an instrument to CFC1 that is treated as indebtedness for country A tax purposes but equity for U.S. Federal income tax purposes. Under country A's income tax laws, the instrument accrues interest at the end of each month, which results in a deduction for CFC2 and an income inclusion and tax liability for CFC1 in country A. The accrual of interest does not result in an inclusion of income for CFC1 for U.S. Federal income tax purposes. Pursuant to the terms of the instrument, CFC2 makes a distribution at the end of the year equal to the amounts of interest that have accrued during the year, and such payment is treated as a dividend that is included in the income of CFC1 for U.S. Federal income tax purposes.
(ii) Result. Pursuant to § 1.909-2(b)(3)(i)(D), because the instrument is treated as equity for U.S. Federal income tax purposes but is treated as indebtedness for country A tax purposes, it is a U.S. equity hybrid instrument. Pursuant to § 1.909-2(b)(3)(i)(A)(3), because the accrual of interest under foreign law does not result in an inclusion of income of CFC1 for U.S. Federal income tax purposes, there is a splitter arrangement. The fact that the payment of the accrued amount at the end of the year pursuant to the terms of the instrument gives rise to a dividend that is included in income of CFC1 for U.S. Federal income tax purposes does not change the result because it is the accrual of interest and not the payment that gives rise to income or deductions under foreign law. The payments will be treated as a distribution of related income to the extent provided by § 1.909-3 and § 1.909-6(d).
(ii) U.S. debt hybrid instrument splitter arrangement—(A) In general. A U.S. debt hybrid instrument is a splitter arrangement if foreign income taxes are paid or accrued by the issuer of a U.S. debt hybrid instrument with respect to income in an amount equal to the interest (including original issue discount) paid or accrued on the instrument that is deductible for U.S. Federal income tax purposes but that does not give rise to a deduction under the laws of a foreign jurisdiction in which the issuer is subject to tax.
(B) Split taxes from a U.S. debt hybrid instrument splitter arrangement. Split taxes from a U.S. debt hybrid instrument splitter arrangement are the foreign income taxes paid or accrued by the issuer on the income that would have been offset by the interest paid or accrued on the U.S. debt hybrid instrument had such interest been deductible for foreign tax purposes.
(C) Related income from a U.S. debt hybrid instrument splitter arrangement. The related income from a U.S. debt hybrid instrument splitter arrangement is the gross amount of the interest income recognized for U.S. Federal income tax purposes by the owner of the U.S. debt hybrid instrument, determined without regard to the actual amount of the owner's income or earnings and profits for U.S. Federal income tax purposes.
(D) U.S. debt hybrid instrument. The term U.S. debt hybrid instrument means an instrument that is treated as equity for foreign tax purposes but as indebtedness for U.S. Federal income tax purposes.
(4) Partnership inter-branch payment splitter arrangements—(i) In general. An allocation of foreign income tax paid or accrued by a partnership with respect to an inter-branch payment as described in § 1.704-1(b)(4)(viii)(d)(3) (revised as of April 1, 2011) (the inter-branch payment tax) is a splitter arrangement to the extent the inter-branch payment tax is not allocated to the partners in the same proportion as the distributive shares of income in the CFTE category to which the inter-branch payment tax is or would be assigned under § 1.704-1(b)(4)(viii)(d) without regard to § 1.704-1(b)(4)(viii)(d)(3).
(ii) Split taxes from a partnership inter-branch payment splitter arrangement. The split taxes from a partnership inter-branch splitter arrangement equal the excess of the amount of the inter-branch payment tax allocated to a partner under the partnership agreement over the amount of the inter-branch payment tax that would have been allocated to the partner if the inter-branch payment tax had been allocated to the partners in the same proportion as the distributive shares of income in the CFTE category referred to in paragraph (b)(4)(i) of this section.
(iii) Related income from a partnership inter-branch payment splitter arrangement. The related income from a partnership inter-branch payment splitter arrangement equals the amount of income allocated to a partner that exceeds the amount of income that would have been allocated to the partner if income in the CFTE category referred to in paragraph (b)(4)(i) of this section in the amount of the inter-branch payment had been allocated to the partners in the same proportion as the inter-branch payment tax was allocated under the partnership agreement.
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Treas. Reg. §1.909-3Rules regarding related income and split taxes
(a) Interim rules for identifying related income and split taxes. The principles of paragraphs (d) through (f) of § 1.909-6 apply to related income and split taxes in taxable years beginning on or after January 1, 2011, except that the alternative method for identifying distributions of related income described in § 1.909-6(d)(4) applies only to identify the amount of pre-2011 split taxes of a section 902 corporation that are suspended as of the first day of the section 902 corporation's first taxable year beginning on or after January 1, 2011.
(b) Split taxes on deductible disregarded payments. Split taxes include taxes paid or accrued in taxable years beginning on or after January 1, 2011, with respect to the amount of a disregarded payment that is deductible by the payor of the disregarded payment under the laws of a foreign jurisdiction in which the payor of the disregarded payment is subject to tax on related income from a splitter arrangement. The amount of the deductible disregarded payment to which this paragraph (b) applies is limited to the amount of related income from such splitter arrangement.
(c) Effective/applicability date. This section applies to taxable years ending after February 9, 2015. See 26 CFR 1.909-3T (revised as of April 1, 2014) for rules applicable to taxable years beginning on or after January 1, 2011, and ending on or before February 9, 2015.
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Treas. Reg. §1.909-3(a)Interim rules for identifying related income and split taxes.
Interim rules for identifying related income and split taxes. The principles of paragraphs (d) through (f) of § 1.909-6 apply to related income and split taxes in taxable years beginning on or after January 1, 2011, except that the alternative method for identifying distributions of related income described in § 1.909-6(d)(4) applies only to identify the amount of pre-2011 split taxes of a section 902 corporation that are suspended as of the first day of the section 902 corporation's first taxable year beginning on or after January 1, 2011.