Instructions for IRS Form 1118 - Foreign Tax Credit - Corporations

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Instructions for Form 1118
Department of the Treasury
Internal Revenue Service
(Rev. December 2018)
Foreign Tax Credit—Corporations
Computer-Generated
domestic corporation with a calendar tax
Section references are to the Internal Revenue
Code unless otherwise noted.
year owns a foreign corporation with a
Form 1118
U.S. tax year beginning on December 1,
Future Developments
The corporation may submit a
2017, and ending on November 30, 2018,
computer-generated Form 1118 and
for its 2018 tax year such domestic
For the latest information about
schedules if they conform to the IRS
corporation is subject to certain
developments related to Form 1118 and
version. However, if a software program is
pre-enactment provisions with respect to
its instructions, such as legislation
used, it must be approved by the IRS for
such foreign corporation. However, if such
enacted after they were published, go to
use in filing substitute forms. This ensures
domestic corporation also owns a foreign
IRS.gov/Form1118.
the proper placement of each item
corporation with a U.S. tax year beginning
appearing on the IRS version. For more
on January 1, 2018, and ending on
What’s New
information, see Pub. 1167, General Rules
December 31, 2018, for its 2018 tax year
and Specifications for Substitute Forms
such domestic corporation is subject to
On December 22, 2017, Congress
and Schedules.
certain post-enactment provisions with
enacted the Tax Cuts and Jobs Act, P.L.
respect to such foreign corporation.
How To Complete
115-97 (the “Act”). The Act changes the
Therefore, the Form 1118 continues to
computation of foreign tax credits for
Form 1118
require reporting under pre-enactment
post-2017 tax years as follows.
provisions, as well as requiring new
Two new separate categories of income
reporting for post-enactment provisions.
Important. Complete a separate
under section 904(d): (i) any amount
Schedule A; Schedule B, Parts I & II;
To incorporate the provisions of the Act,
includible in gross income under section
Schedules C through G; Schedule I; and
extensive changes have been made to the
951A (other than passive category
Schedule K for each applicable separate
form, as explained throughout these
income) (“section 951A category income”)
category of income. See
Categories of
instructions.
and (ii) foreign branch income.
Income, later. Complete Schedule B, Part
Repeal of section 902 indirect credits
General Instructions
III; Schedule H; and Schedule J only once.
with respect to dividends from foreign
Use Schedule A to compute the
corporations.
corporation's income or loss before
Modified indirect credits under section
Purpose of Form
adjustments for each applicable category
960 for inclusions under sections 951(a)
of income.
Use Form 1118 to compute a
(1) and 951A.
Use Schedule B to determine the total
corporation's foreign tax credit for certain
Modified section 78 gross up with
foreign tax credit after certain limitations.
taxes paid or accrued to foreign countries
respect to inclusions under sections
Use Schedule C to compute taxes
or U.S. possessions. See
Taxes Eligible
951(a)(1) and 951A.
deemed paid by the domestic corporation
for a
Credit, later.
Revised sourcing rule for certain
filing the return with respect to inclusions
income from the sale of inventory under
Who Must File
under section 951(a)(1) in post-2017
section 863(b).
foreign corporate tax years.
Repeal of the fair market value method
Any corporation that elects the benefits of
Use Schedule D to compute taxes
for apportioning interest expense under
the foreign tax credit under section 901
deemed paid by the domestic corporation
864(e).
must complete and attach Form 1118 to
filing the return with respect to inclusions
New adjustments for purposes of
its income tax return.
under section 951A in post-2017 foreign
section 904 with respect to expenses
corporate tax years.
When To Make the
allocable to certain stock or dividends for
Use Schedule E to compute taxes
which a dividends received deduction is
Election
deemed paid by the domestic corporation
allowed under section 245A.
filing the return with respect to
The election to claim the foreign tax credit
Election to increase pre-2018 section
distributions of previously taxed income
904(g) Overall Domestic Loss (ODL)
(or a deduction in lieu of a credit) for any
(PTI).
recapture.
tax year may be made or changed at any
Use Schedule F-1 to compute taxes
Limited foreign tax credits with respect
time before the end of a special 10-year
deemed paid by the domestic corporation
to inclusions under section 965.
period described in section 6511(d)(3) (or
filing the return with respect to dividends
section 6511(c) if the period is extended
Several of the foreign tax credit provisions
paid and inclusions in pre-2018 foreign
by agreement). Note that while the
of the Act are applicable in tax years of
corporate tax years.
limitations period for refund claims relating
foreign corporations beginning after
Use Schedules F-2 and F-3 to
to a foreign tax credit generally runs
December 31, 2017, and to tax years of
compute taxes deemed paid by first- and
parallel with the election period, the
U.S. shareholders in which or with which
lower-tier foreign corporations with
limitations period for refund claims relating
such tax years of the foreign corporations
respect to dividends paid in pre-2018
to a deduction of foreign tax does not, and
end (“post-2017 foreign corporate tax
foreign corporate tax years.
may expire before the end of the election
year”). As such, if the foreign corporation's
Use Schedule G to report required
period.
year begins before 2018 (“pre-2018
reductions of tax paid, accrued, or
foreign corporate tax year”), some
deemed paid.
pre-enactment rules continue to apply in
Use Schedule H to apportion
the domestic corporation's tax year
deductions that cannot be allocated to an
beginning in 2018. For example, if a
Nov 19, 2018
Cat. No. 10905I
Instructions for Form 1118
Department of the Treasury
Internal Revenue Service
(Rev. December 2018)
Foreign Tax Credit—Corporations
Computer-Generated
domestic corporation with a calendar tax
Section references are to the Internal Revenue
Code unless otherwise noted.
year owns a foreign corporation with a
Form 1118
U.S. tax year beginning on December 1,
Future Developments
The corporation may submit a
2017, and ending on November 30, 2018,
computer-generated Form 1118 and
for its 2018 tax year such domestic
For the latest information about
schedules if they conform to the IRS
corporation is subject to certain
developments related to Form 1118 and
version. However, if a software program is
pre-enactment provisions with respect to
its instructions, such as legislation
used, it must be approved by the IRS for
such foreign corporation. However, if such
enacted after they were published, go to
use in filing substitute forms. This ensures
domestic corporation also owns a foreign
IRS.gov/Form1118.
the proper placement of each item
corporation with a U.S. tax year beginning
appearing on the IRS version. For more
on January 1, 2018, and ending on
What’s New
information, see Pub. 1167, General Rules
December 31, 2018, for its 2018 tax year
and Specifications for Substitute Forms
such domestic corporation is subject to
On December 22, 2017, Congress
and Schedules.
certain post-enactment provisions with
enacted the Tax Cuts and Jobs Act, P.L.
respect to such foreign corporation.
How To Complete
115-97 (the “Act”). The Act changes the
Therefore, the Form 1118 continues to
computation of foreign tax credits for
Form 1118
require reporting under pre-enactment
post-2017 tax years as follows.
provisions, as well as requiring new
Two new separate categories of income
reporting for post-enactment provisions.
Important. Complete a separate
under section 904(d): (i) any amount
Schedule A; Schedule B, Parts I & II;
To incorporate the provisions of the Act,
includible in gross income under section
Schedules C through G; Schedule I; and
extensive changes have been made to the
951A (other than passive category
Schedule K for each applicable separate
form, as explained throughout these
income) (“section 951A category income”)
category of income. See
Categories of
instructions.
and (ii) foreign branch income.
Income, later. Complete Schedule B, Part
Repeal of section 902 indirect credits
General Instructions
III; Schedule H; and Schedule J only once.
with respect to dividends from foreign
Use Schedule A to compute the
corporations.
corporation's income or loss before
Modified indirect credits under section
Purpose of Form
adjustments for each applicable category
960 for inclusions under sections 951(a)
of income.
Use Form 1118 to compute a
(1) and 951A.
Use Schedule B to determine the total
corporation's foreign tax credit for certain
Modified section 78 gross up with
foreign tax credit after certain limitations.
taxes paid or accrued to foreign countries
respect to inclusions under sections
Use Schedule C to compute taxes
or U.S. possessions. See
Taxes Eligible
951(a)(1) and 951A.
deemed paid by the domestic corporation
for a
Credit, later.
Revised sourcing rule for certain
filing the return with respect to inclusions
income from the sale of inventory under
Who Must File
under section 951(a)(1) in post-2017
section 863(b).
foreign corporate tax years.
Repeal of the fair market value method
Any corporation that elects the benefits of
Use Schedule D to compute taxes
for apportioning interest expense under
the foreign tax credit under section 901
deemed paid by the domestic corporation
864(e).
must complete and attach Form 1118 to
filing the return with respect to inclusions
New adjustments for purposes of
its income tax return.
under section 951A in post-2017 foreign
section 904 with respect to expenses
corporate tax years.
When To Make the
allocable to certain stock or dividends for
Use Schedule E to compute taxes
which a dividends received deduction is
Election
deemed paid by the domestic corporation
allowed under section 245A.
filing the return with respect to
The election to claim the foreign tax credit
Election to increase pre-2018 section
distributions of previously taxed income
904(g) Overall Domestic Loss (ODL)
(or a deduction in lieu of a credit) for any
(PTI).
recapture.
tax year may be made or changed at any
Use Schedule F-1 to compute taxes
Limited foreign tax credits with respect
time before the end of a special 10-year
deemed paid by the domestic corporation
to inclusions under section 965.
period described in section 6511(d)(3) (or
filing the return with respect to dividends
section 6511(c) if the period is extended
Several of the foreign tax credit provisions
paid and inclusions in pre-2018 foreign
by agreement). Note that while the
of the Act are applicable in tax years of
corporate tax years.
limitations period for refund claims relating
foreign corporations beginning after
Use Schedules F-2 and F-3 to
to a foreign tax credit generally runs
December 31, 2017, and to tax years of
compute taxes deemed paid by first- and
parallel with the election period, the
U.S. shareholders in which or with which
lower-tier foreign corporations with
limitations period for refund claims relating
such tax years of the foreign corporations
respect to dividends paid in pre-2018
to a deduction of foreign tax does not, and
end (“post-2017 foreign corporate tax
foreign corporate tax years.
may expire before the end of the election
year”). As such, if the foreign corporation's
Use Schedule G to report required
period.
year begins before 2018 (“pre-2018
reductions of tax paid, accrued, or
foreign corporate tax year”), some
deemed paid.
pre-enactment rules continue to apply in
Use Schedule H to apportion
the domestic corporation's tax year
deductions that cannot be allocated to an
beginning in 2018. For example, if a
Nov 19, 2018
Cat. No. 10905I
item or class of income identified on
Section 951A category income is
Dividends from a domestic international
Schedule A.
effective in post-2017 foreign corporate
sales corporation (DISC) or former DISC
Use Schedule I (a separate schedule)
tax years.
(as defined in section 992(a)) to the extent
to compute reductions of taxes paid,
such dividends are treated as foreign
Foreign Branch Category
accrued, or deemed paid on foreign oil
source income, and
Income
and gas income.
Distributions from a former foreign sales
Use Schedule J (a separate schedule)
corporation (FSC) out of earnings and
Foreign branch income is defined under
to compute adjustments to separate
profits attributable to foreign trade income
section 904(d)(2)(J)(i) as the business
limitation income or losses in determining
or interest or carrying charges (as defined
profits of a U.S. person which are
the numerators of limitation fractions,
in section 927(d)(1), before its repeal)
attributable to one or more qualified
year-end recharacterization balances, and
derived from a transaction which results in
business units (QBUs) (as defined in
overall foreign and domestic loss account
foreign trade income (as defined in section
section 989(a)) in one or more foreign
balances.
932(b), before its repeal).
countries.
Use Schedule K (a separate schedule)
When completing a Form 1118 for
Section 901(j) Income
to reconcile the corporation's prior year
foreign branch category income, insert the
No credit is allowed for foreign taxes
foreign tax carryover with its current year
following code at the top of page 1: FB.
imposed by and paid or accrued to certain
foreign tax carryover.
Foreign branch category income does
sanctioned countries. However, a foreign
not include passive category income.
For purposes of reporting the
tax credit may be claimed for foreign taxes
Foreign branch category income is
beginning balances on Schedules
!
paid or accrued with respect to section
effective for tax years of U.S. persons
J and K of this form, if the
901(j) income if such tax is paid or
CAUTION
beginning after December 31, 2017.
taxpayer was required to exclude section
accrued to a country other than a
965-related amounts for purposes of 2017
Passive Category Income
sanctioned country.
reporting, report the amounts that would
Passive category income includes passive
have been reported as the ending
Income derived from each sanctioned
income and specified passive category
balances on the 2017 Schedules J and K
country is subject to a separate foreign tax
income. When completing a Form 1118
had the taxpayer not excluded the section
credit limitation. Therefore, the corporation
for passive category income, insert the
965-related amounts in its 2017 reporting.
must use a separate Form 1118 for
following code at the top of page 1: PAS.
See
IRS.gov/newsroom/questions-and-
income derived from each such country.
answers-about-reporting-related-to-
Passive income. Generally, passive
On each Form 1118, insert the code
section-965-on-2017-tax-returns.
income is the following.
“901j” at the top of page 1 and identify the
Any income received or accrued that
applicable country using the two-letter
Categories of Income
would be foreign personal holding
codes (from the list at
IRS.gov/
company income (defined in section
CountryCodes).
Compute a separate foreign tax credit
954(c)) if the corporation were a controlled
(using a separate Form 1118) for each
foreign corporation (CFC) (defined in
Sanctioned countries are those
applicable separate category described
section 957). This includes any gain on
designated by the Secretary of State as
below. Enter the applicable code from the
the sale or exchange of stock that is more
countries that repeatedly provide support
table below in item a at the top of page 1
than the amount treated as a dividend
for acts of international terrorism,
of Form 1118 to indicate the separate
under section 1248. However, in
countries with which the United States
category with respect to which you are
determining if any income would be
does not have diplomatic relations, or
completing a given Form 1118.
foreign personal holding company income,
countries whose governments are not
the rules of section 864(d)(6) will apply
recognized by the United States. As of the
only for income of a CFC.
Code
Category of Income
date these instructions were revised,
Any amount includible in gross income
section 901(j) applied to income derived
951A
Section 951A Category Income
under section 1293 (which relates to
from Iran, North Korea, Sudan, and Syria.
certain passive foreign investment
FB
Foreign Branch Category Income
For more information, see section 901(j).
companies (PFICs)).
PAS
Passive Category Income
Note. Effective December 22, 2015,
Passive income does not include:
901j
Section 901(j) Income
Cuba is no longer a sanctioned country.
Any financial services income,
RBT
Income Re-Sourced by Treaty
Any export financing interest unless it is
Note. The President of the United States
also related person factoring income (see
GEN
General Category Income
has the authority to waive the application
section 904(d)(2)(G) and Regulations
of section 901(j) with respect to a foreign
section 1.904-4(h)(3)),
country if it is (a) in the national interest of
Any high-taxed income, or
If you enter code "901j" or code "RBT"
the United States and will expand trade
Any active rents or royalties. See
in item a, also complete item b or item c
and investment opportunities for domestic
Regulations section 1.904-4(b)(2)(iii) for
using the country codes provided at
companies in such foreign country, and
definitions and exceptions.
IRS.gov/CountryCodes.
(b) the President reports to the Congress,
Section 951A Category Income
not less than 30 days before the waiver is
Note. Certain income received from a
granted, the intention to grant such a
CFC and certain dividends from
Section 951A category income is any
waiver and the reason for such waiver.
noncontrolled 10%-owned foreign
amount includible in gross income under
corporations that would otherwise be
section 951A (other than passive category
Note. Effective December 10, 2004, the
passive income are treated as passive
income). Section 951A defines global
President waived the application of
category income only to the extent
intangible low-taxed income.
section 901(j) with respect to Libya.
provided under the look-through rules.
When completing a Form 1118 for
See
Look-Through
Rules, later.
section 951A category income, insert the
If the corporation paid taxes to a
following code at the top of page 1: 951A.
country that ceased to be a sanctioned
Specified passive category income.
Section 951A category income does
country during the tax year, see Rev. Rul.
This term includes:
not include passive category income.
92-62, 1992-2 C.B. 193, for details on how
Instructions for Form 1118 (12-2018)
-2-
Amounts That Do Not
to figure the foreign tax credit for the
member of a financial services group (as
period that begins after the end of the
defined in section 904(d)(2)(C)(ii)) or is
Constitute Income Under
sanctioned period.
predominantly engaged in the active
U.S. Tax Principles
conduct of a banking, insurance,
Note. Taxpayers will complete one
financing, or similar business.
For tax years beginning after December
Schedule H (Form 965), Inclusion of
31, 2006, creditable foreign taxes that are
Financial services income. Financial
Deferred Foreign Income Upon Transition
imposed on amounts that do not constitute
services income is income received or
to Participation Exemption System, with
income under U.S. tax principles are
accrued by a member of a financial
respect to income derived from all
treated as imposed on income described
services group or any corporation
sanctioned countries. However, a
in section 904(d)(1)(B). See section
predominantly engaged in the active
separate Form 1118 must be completed
904(d)(2)(H).
conduct of a banking, insurance,
with respect to section 965 inclusions
Look-Through Rules
financing, or similar business, if the
attributable to each sanctioned country.
income is:
Income Re-Sourced by Treaty
CFCs. Generally, dividends, interest,
Described in section 904(d)(2)(D)(ii),
rents, and royalties received or accrued by
Passive income (determined without
If a sourcing rule in an applicable income
the taxpayer are passive category income.
regard to section 904(d)(2)(B)(iii)(II)), or
tax treaty treats any U.S. source income
However, if these items are received or
Incidental income described in
as foreign source, and the corporation
accrued by a 10% U.S. shareholder from a
Regulations section 1.904-4(e)(4).
elects to apply the treaty, the income will
CFC, they may be assigned to other
be treated as foreign source.
separate categories, or may be treated as
Note. If the corporation qualified as a
passive category income under the
financial services entity because it treated
Important. The corporation must
look-through rules of section 904(d)(3).
certain amounts as active financing
compute a separate foreign tax credit
Dividends include any amount included in
income that are not listed in Regulations
limitation for any such income for which it
gross income under section 951(a)(1)(B).
sections 1.904-4(e)(2)(i)(A) through (X),
claims benefits under a treaty, using a
but that are described as similar items in
Look-through rules also apply to
separate Form 1118 for each amount of
Regulations section 1.904-4(e)(2)(i)(Y),
subpart F inclusions under section 951(a)
re-sourced income from a treaty country.
attach a statement to Form 1118 showing
(1)(A) to the extent attributable to E&P of
On each Form 1118, insert the code
the types and amounts of the similar
the CFC in the passive category.
“RBT” for income re-sourced by treaty at
items.
the top of page 1 and identify the
For more information and examples,
applicable country using the two-letter
see section 904(d)(3) and Regulations
Special Rules
codes (from the list at
IRS.gov/
section 1.904-5.
CountryCodes). See sections 865(h),
Source Rules for Income
Noncontrolled 10%-Owned Foreign
904(d)(6), and 904(h)(10) and the
Corporations. Generally, dividends
Determine income or (loss) for each
regulations under those sections
received or accrued by the taxpayer are
separate category on Schedule A using
(including Regulations section 1.904-5(m)
passive category income. However,
the general source rules of sections 861
(7)) for any grouping rules and exceptions.
dividends received or accrued from a
through 865 and related regulations, the
noncontrolled 10%-owned foreign
Note. U.S. source section 965 inclusions
special source rules of section 904(h)
corporation may be assigned to other
described below, and any applicable
will not be reported on Schedule H of the
separate categories under the
source rules contained in any applicable
Form 965. If a taxpayer elects to treat such
look-through rules of section 904(d)(4).
inclusions as foreign source income under
tax treaties.
a treaty, use a separate Form 1118 for
Certain amounts paid by a domestic
Special source rules of section 904(h).
each amount of re-sourced section 965
corporation to a related corporation.
Usually, the following income from a
inclusion from a treaty country.
Look-through rules also apply to foreign
U.S.-owned foreign corporation, otherwise
source interest, rents, and royalties paid
General Category Income
treated as foreign source income, must be
by a domestic corporation to a related
treated as U.S. source income under
This category includes all income not
corporation. See Regulations section
section 904(h).
described above. When completing a
1.904-5(g).
Any subpart F income, foreign personal
Form 1118 for the general category of
holding company income, or income from
Other Rules
income, insert the following code at the
a qualified electing fund that a U.S.
top of page 1: GEN. This category
shareholder is required to include in its
Certain transfers of intangible proper-
includes high taxed income that is not
gross income, if such amount is
ty. See section 367(d)(2)(C) for a rule that
otherwise treated as another category of
clarifies the treatment of certain transfers
attributable to the U.S.-owned foreign
income. Usually, income is high-taxed if
of intangible property.
corporation's U.S. source income.
the total foreign income taxes paid,
Interest that is properly allocable to the
Reporting Foreign Tax
accrued, or deemed paid by the
U.S.-owned foreign corporation's U.S.
corporation for that income exceed the
Information From Partnerships
source income.
highest rate of tax specified in section 11
Dividends equal to the U.S. source ratio
If you received a Schedule K-1 from a
(and with reference to section 15, if
(defined in section 904(h)(4)(B)).
partnership that includes foreign tax
applicable), multiplied by the amount of
information, use the rules below to report
The rules regarding interest and
such income (including the amount treated
that information on Form 1118.
dividends described above do not apply to
as a dividend under section 78). For more
a U.S.-owned foreign corporation if less
information, see Regulations section
Gross income sourced at partner level.
than 10% of its earnings and profits (E&P)
1.904-4(c). Also see the instructions for
This includes income from the sale of
for the tax year is from U.S. sources.
Schedule A, later, for additional reporting
most personal property other than
requirements.
inventory, depreciable property, and
certain intangible property sourced under
This category also includes financial
section 865. This gross income will
services income (defined below) not
described above if the corporation is a
Instructions for Form 1118 (12-2018)
-3-
Credit or Deduction
generally be U.S.-source and therefore
Taxes deemed paid under sections 902
will not be reported on Form 1118.
(for pre-2018 foreign corporate tax years)
A corporation may choose to take either a
and 960.
The remaining lines of the foreign tax
credit or a deduction for eligible foreign
Taxes paid in lieu of income taxes as
section of the Schedule K-1 are reported
taxes paid or accrued. The choice is made
described in section 903 and Regulations
on Form 1118 as follows.
annually. Generally, if a corporation elects
section 1.903-1.
the benefits of the foreign tax credit for any
Foreign gross income sourced at part-
Some foreign taxes that are otherwise
tax year, no portion of the foreign taxes
nership level. Report on Schedule A.
eligible for the foreign tax credit must be
will be allowed as a deduction in that year
Deductions allocated and apportioned
reduced. These reductions are reported
or any subsequent tax year.
at partner level and partnership level.
on Schedule G.
Exceptions. However, a corporation that
Report on Schedule A or Schedule H.
elects the credit for eligible foreign taxes
Note. A corporation may not claim a
Total foreign taxes paid or accrued.
may be allowed a deduction for certain
foreign tax credit for foreign taxes paid to a
Report on Schedule B.
taxes for which a credit was not allowed.
foreign country that the corporation does
These include the following.
not legally owe, including amounts eligible
Reduction in taxes available for credit.
Taxes for which the credit was denied
for refund by the foreign country. If the
Report on Schedule G.
because of the boycott provisions of
corporation does not exercise its available
Capital Gains
section 908.
remedies to reduce the amount of foreign
Certain taxes on the purchase or sale of
Foreign source taxable income or (loss)
tax to what it legally owes, a credit is not
oil or gas (section 901(f)).
before adjustments in all separate
allowed for the excess amount.
Certain taxes used to provide subsidies
categories in the aggregate should include
Foreign corporations. Foreign
(section 901(i)).
gain from the sale or exchange of capital
corporations are allowed (under section
Taxes paid to certain foreign countries
assets only up to the amount of foreign
906) a foreign tax credit for income, war
for which a credit was denied under
source capital gain net income (which is
profits, and excess profits taxes paid or
section 901(j).
the smaller of capital gain net income from
accrued (or deemed paid under section
Certain taxes paid on dividends if the
sources outside the United States or
902 (for pre-2018 foreign corporate tax
minimum holding period is not met with
capital gain net income). Therefore, if the
years)) to any foreign country or U.S.
respect to the underlying stock, or if the
corporation has capital gain net income
possession for income effectively
corporation is obligated to make related
from sources outside the United States in
connected with the conduct of a trade or
payments with respect to positions in
excess of the capital gain net income
business within the United States. The
similar or related property (section 901(k)).
reported on its tax return, enter a pro rata
credit is not applicable, however, if a
Certain taxes paid on gain and income
portion of the net U.S. source capital loss
foreign country or U.S. possession
other than dividends if the minimum
as a negative number on Schedule A,
imposes the tax on income from U.S.
holding period is not met with respect to
column 14(h), for each separate category
sources solely because the foreign
the underlying property, or if the
with capital gain net income from sources
corporation was created or organized
corporation is obligated to make related
outside the United States. To figure the
under the law of the foreign country or
payments with respect to positions in
pro rata portion of the net U.S. source
U.S. possession or is domiciled there for
similar or related property (see section
capital loss attributable to a separate
tax purposes.
901(l)).
category, multiply the net U.S. source
The credit may not be taken against
In the case of a covered asset
capital loss by the amount of capital gain
any tax imposed on income not effectively
acquisition (as defined in section 901(m)
net income from sources outside the
connected with a U.S. business.
(2)), the disqualified portion of any tax
United States in the separate category
determined with respect to the income or
divided by the aggregate amount of capital
In computing the foreign tax credit
gain attributable to the relevant foreign
gain net income from sources outside the
limitation, the foreign corporation's taxable
assets (section 901(m)). Note. This rule
United States in all separate categories
income includes only the taxable income
generally applies to covered asset
with capital gain net income from sources
that is effectively connected with the
acquisitions after December 31, 2010.
outside the United States.
conduct of a trade or business within the
See temporary and proposed Regulations
United States.
See section 904(b)(2)(B) for special
sections 1.901(m)-1 through 1.901(m)-8
For pre-2018 foreign corporate tax
rules regarding adjustments to account for
for additional information. Note that the
years, a foreign corporation claiming a
capital gain rate differentials (as defined in
rules contained in these regulations have
foreign tax credit will be treated as a
section 904(b)(3)(D)) for any tax year. At
later effective dates.
domestic corporation in computing tax
the time these instructions went to print,
No Credit or Deduction
deemed paid (section 902(a)) and
there was no capital gain rate differential
dividend gross-up (section 78).
for corporations.
No foreign tax credit (or deduction) is
allowed for certain taxes including.
Definition of foreign corporation for
Credit Limitations
Taxes on mineral income that were
purposes of the deemed paid credit. In
reduced under section 901(e).
computing the deemed paid credit on
Taxes Eligible for a Credit
Certain taxes paid on distributions from
Schedules F-1 through F-3, the term
possessions corporations (section
“foreign corporation” includes:
Domestic corporations. Generally, a
901(g)).
A DISC or former DISC, but only for
domestic corporation may claim a foreign
Taxes on combined foreign oil and gas
dividends from the DISC or former DISC
tax credit (subject to the limitation of
income that were reduced under section
that are treated as income from sources
section 904) for the following taxes.
907(a).
outside the United States; and
Income, war profits, and excess profits
Taxes attributable to income excluded
A contiguous country life insurance
taxes (defined in Regulations section
under section 814(a) (relating to
branch that has made an election to be
1.901-2(a)) paid or accrued during the tax
contiguous country branches of domestic
treated as a foreign corporation under
year to any foreign country or U.S.
life insurance companies).
section 814(g).
possession.
Taxes paid or accrued to a foreign
country or U.S. possession with respect to
Instructions for Form 1118 (12-2018)
-4-
income excluded from gross income on
Regulations section 301.6114-1 for
1. The date or dates on which the
Form 8873, Extraterritorial Income
details.
foreign taxes were accrued, paid, and
Exclusion. However, see section 943(d)
refunded.
Failure to make such a report may
for an exception for certain withholding
2. The amount of foreign taxes
result in a $10,000 penalty.
taxes.
accrued, paid, and refunded on each date
The applicable percentage of taxes
(in foreign currency).
Proof of Credits
paid or deemed paid with respect to an
3. The exchange rates used to
amount included in income under section
Form 1118 must be carefully filled in with
translate such amounts.
965 (section 965(g)).
all the information called for and with the
Foreign taxes that when paid differ
calculations of credits indicated.
Carryback and Carryforward of
from the accrued amounts claimed as
credits for a year beginning before
Excess Foreign Taxes
Important. Documentation (that is,
1998.
receipts of payments or a foreign tax
If the allowable foreign taxes paid,
1. The date on which the foreign taxes
return for accrued taxes) is not required to
accrued, or deemed paid in a tax year in a
were accrued.
be attached to Form 1118. However, proof
separate category exceed the foreign tax
must be presented upon request by the
credit limitation for the tax year for that
2. The dates on which the foreign
IRS to substantiate the credit. See
separate category, the excess may be:
taxes were paid.
Regulations section 1.905-2.
First, carried back 1 year to offset taxes
3. The exchange rate for each date
imposed in the same category, then
the foreign taxes were accrued and paid.
If the corporation claims a foreign tax
Carried forward 10 years to offset taxes
4. The amount of foreign taxes
credit for tax accrued but not paid, the IRS
imposed in the same category.
accrued or paid on each such date (in
may require a bond to be furnished on
foreign currency).
The excess is applied first to the
Form 1117, Income Tax Surety Bond,
Foreign taxes that when paid differ
earliest of the years to which it may be
before the credit is allowed. See
from accrued amounts claimed as
Regulations section 1.905-2(c).
carried, then to the next earliest year, etc.
credits for a tax year beginning after
The corporation may not carry a credit to a
Foreign Tax Credit
1997 because the corporation paid
tax year for which it claimed a deduction,
more or less foreign tax than was
rather than a credit, for foreign taxes paid
Redeterminations
originally accrued or failed to pay
or accrued. Furthermore, the corporation
The corporation's foreign tax credit and
accrued taxes within 2 years.
must reduce the amount of any carryback
U.S. tax liability generally must be
or carryforward by the amount it would
1. The date on which the foreign taxes
redetermined if:
have used if it had chosen to claim a credit
were accrued.
Accrued foreign taxes when paid differ
rather than a deduction in that tax year.
2. The dates on which the foreign
from the amounts claimed as credits,
These carryover provisions do not apply to
taxes were paid.
Accrued foreign taxes are not paid
foreign taxes assigned to section 951A
3. The exchange rate used to
within 2 years after the close of the tax
category income. See section 904(c) and
translate the foreign taxes in the year for
year to which they relate, or
Regulations section 1.904-2 for more
which the foreign taxes were accrued.
Any foreign tax paid is fully or partially
details.
refunded.
4. For taxes paid more than 2 years
How to claim the excess credit. If the
after the year to which they relate, the
corporation is carrying back the excess
Except as provided in Temporary
exchange rate at the time of payment.
credit to an earlier year, file an amended
Regulations section 1.905-3T(d)(3), a
5. The amount of tax accrued or paid
tax return with a revised Form 1118 and
redetermination of U.S. tax liability is not
for each such date, and the amount of
schedules (including a revised Schedule K
required to account for the effect of a
accrued tax that was not paid within 2
(Form 1118)).
redetermination in a pre-2018 foreign
years (in foreign currency).
corporate tax year of foreign tax paid or
Foreign taxes deemed paid under
Special rules apply to:
accrued by a foreign corporation on the
section 902 (for pre-2018 foreign
The carryback and carryforward of
amount of foreign taxes deemed paid
corporate tax years) or 960. If the
foreign taxes paid or accrued on
under section 902 or 960. Instead, the
corporation is required to make a
combined foreign oil and gas income or
foreign corporation's pools of E&P and
redetermination of a U.S. tax liability under
related taxes (see section 907(f)), and
foreign taxes are adjusted in the year of
Temporary Regulations section
An excess foreign tax credit for which
the foreign tax redetermination.
1.905-3T(d)(3) (for pre-2018 foreign
an excess limitation account was
Reporting Requirements
corporate tax years) or section 905(c) (for
established under section 960(b)(2)
post-2017 foreign corporate tax years),
(pre-2018 foreign corporate tax years) and
If the corporation must redetermine its
include the following basic information as
section 960(c)(2) (post-2017 foreign
U.S. tax liability, the corporation must:
an attachment to the tax return for the year
corporate tax years).
File an amended return and Form 1118
for which the redetermination applies.
with the Service Center where it filed the
Treaty-Based Return
tax return on which it claimed the affected
1. The dates and amounts of any
Positions
foreign tax credit; and
dividend distributions or other inclusions
Provide identifying information such as
from E&P for the affected year or years.
Corporations that adopt a return position
the corporation's name, address,
2. The amount of E&P from which
that any U.S. treaty overrides or modifies
employer identification number (EIN), and
such dividends were paid for the affected
any provision of the Internal Revenue
the tax year or years that are affected by
year or years.
Code, and causes (or potentially causes)
the redetermination.
a reduction of any tax incurred at any time,
3. The balances of the pools of E&P
Additional information required. If the
generally must disclose this position.
and foreign taxes for pre-2018 foreign
redetermination was because of one of the
Complete Form 8833, Treaty-Based
corporate tax years or the foreign income
following, the corporation must provide the
Return Position Disclosure Under Section
taxes properly attributable to inclusions for
additional information as indicated.
6114 or Section 7701(b), and attach it to
post-2017 foreign corporate tax years
Refund of foreign taxes paid.
Form 1118. See section 6114 and
Instructions for Form 1118 (12-2018)
-5-

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