26 USC 881 - Tax on income of foreign corporations not connected with United States business

U.S Code last checked for updates: Nov 23, 2024

§ 881.

Tax on income of foreign corporations not connected with United States business

(a)

Imposition of tax

Except as provided in subsection (c), there is hereby imposed for each taxable year a tax of 30 percent of the amount received from sources within the United States by a foreign corporation as—

(1)

interest (other than original issue discount as defined in section 1273), dividends, rents, salaries, wages, premiums, annuities, compensations, remunerations, emoluments, and other fixed or determinable annual or periodical gains, profits, and income,

(2)

gains described in section 631(b) or (c),

(3)

in the case of—

(A)

a sale or exchange of an original issue discount obligation, the amount of the original issue discount accruing while such obligation was held by the foreign corporation (to the extent such discount was not theretofore taken into account under subparagraph (B)), and

(B)

a payment on an original issue discount obligation, an amount equal to the original issue discount accruing while such obligation was held by the foreign corporation (except that such original issue discount shall be taken into account under this subparagraph only to the extent such discount was not theretofore taken into account under this subparagraph and only to the extent that the tax thereon does not exceed the payment less the tax imposed by paragraph (1) thereon), and

(4)

gains from the sale or exchange after October 4, 1966, of patents, copyrights, secret processes and formulas, good will, trademarks, trade brands, franchises, and other like property, or of any interest in any such property, to the extent such gains are from payments which are contingent on the productivity, use, or disposition of the property or interest sold or exchanged,

but only to the extent the amount so received is not effectively connected with the conduct of a trade or business within the United States.

(b)

Exception for certain possessions

(1)

Guam, American Samoa, the Northern Mariana Islands, and the Virgin Islands

For purposes of this section and section 884, a corporation created or organized in Guam, American Samoa, the Northern Mariana Islands, or the Virgin Islands or under the law of any such possession shall not be treated as a foreign corporation for any taxable year if—

(A)

at all times during such taxable year less than 25 percent in value of the stock of such corporation is beneficially owned (directly or indirectly) by foreign persons,

(B)

at least 65 percent of the gross income of such corporation is shown to the satisfaction of the Secretary to be effectively connected with the conduct of a trade or business in such a possession or the United States for the 3-year period ending with the close of the taxable year of such corporation (or for such part of such period as the corporation or any predecessor has been in existence), and

(C)

no substantial part of the income of such corporation is used (directly or indirectly) to satisfy obligations to persons who are not bona fide residents of such a possession or the United States.

(2)

Commonwealth of Puerto Rico

(A)

In general

If dividends are received during a taxable year by a corporation—

(i)

created or organized in, or under the law of, the Commonwealth of Puerto Rico, and

(ii)

with respect to which the requirements of subparagraphs (A), (B), and (C) of paragraph (1) are met for the taxable year,

subsection (a) shall be applied for such taxable year by substituting “10 percent” for “30 percent”.

(B)

Applicability

(3)

Definitions

(A)

Foreign person

For purposes of paragraph (1), the term “foreign person” means any person other than—

(i)

a United States person, or

(ii)

a person who would be a United States person if references to the United States in section 7701 included references to a possession of the United States.

(B)

Indirect ownership rules

(c)

Repeal of tax on interest of foreign corporations received from certain portfolio debt investments

(1)

In general

(2)

Portfolio interest

(A)

would be subject to tax under subsection (a) but for this subsection, and

(B)

is paid on an obligation—

(i)

which is in registered form, and

(ii)

with respect to which—

(I)

the person who would otherwise be required to deduct and withhold tax from such interest under section 1442(a) receives a statement which meets the requirements of section 871(h)(5) that the beneficial owner of the obligation is not a United States person, or

(II)

the Secretary has determined that such a statement is not required in order to carry out the purposes of this subsection.

(3)

Portfolio interest shall not include interest received by certain persons

For purposes of this subsection, the term “portfolio interest” shall not include any portfolio interest which—

(A)

except in the case of interest paid on an obligation of the United States, is received by a bank on an extension of credit made pursuant to a loan agreement entered into in the ordinary course of its trade or business,

(B)

is received by a 10-percent shareholder (within the meaning of section 871(h)(3)(B)), or

(C)

is received by a controlled foreign corporation from a related person (within the meaning of section 864(d)(4)).

(4)

Portfolio interest not to include certain contingent interest

(5)

Special rules for controlled foreign corporations

(A)

In general

In the case of any portfolio interest received by a controlled foreign corporation, the following provisions shall not apply:

(i)

Subparagraph (A) of section 954(b)(3) (relating to exception where foreign base company income is less than 5 percent or $1,000,000).

(ii)

Paragraph (4) of section 954(b) (relating to exception for certain income subject to high foreign taxes).

(iii)

Clause (i) of section 954(c)(3)(A) (relating to certain income received from related persons).

(B)

Controlled foreign corporation

(6)

Secretary may cease application of this subsection

(7)

Registered form

(d)

Tax not to apply to certain interest and dividends

(e)

Tax not to apply to certain dividends of regulated investment companies

(1)

Interest-related dividends

(A)

In general

(B)

Exception

Subparagraph (A) shall not apply—

(i)

to any dividend referred to in section 871(k)(1)(B), and

(ii)

to any interest-related dividend received by a controlled foreign corporation (within the meaning of section 957(a)) to the extent such dividend is attributable to interest received by the regulated investment company from a person who is a related person (within the meaning of section 864(d)(4)) with respect to such controlled foreign corporation.

(C)

Treatment of dividends received by controlled foreign corporations

(2)

Short-term capital gain dividends

(f)

Cross reference

(Aug. 16, 1954, ch. 736, 68A Stat. 282; Pub. L. 89–809, title I, § 104(a), Nov. 13, 1966, 80 Stat. 1555; Pub. L. 92–178, title III, § 313(a), (c), Dec. 10, 1971, 85 Stat. 526, 527; Pub. L. 92–606, § 1(e)(1), Oct. 31, 1972, 86 Stat. 1497; Pub. L. 94–455, title XIX, § 1901(b)(3)(I), Oct. 4, 1976, 90 Stat. 1793; Pub. L. 98–369, div. A, title I, §§ 42(a)(10), 127(b), 128(b), 130(a), July 18, 1984, 98 Stat. 557, 650, 654, 660; Pub. L. 99–514, title XII, §§ 1211(b)(6), 1214(c)(2), 1223(b)(2), 1273(b)(1), (2)(A), title XVIII, §§ 1810(d)(1)(B), (3)(C), (e)(2)(B), 1899A(22), (23), (68), Oct. 22, 1986, 100 Stat. 2536, 2542, 2558, 2595, 2596, 2825, 2826, 2959, 2962; Pub. L. 100–647, title I, § 1012(i)(17), Nov. 10, 1988, 102 Stat. 3510; Pub. L. 103–66, title XIII, § 13237(a)(2), (c)(2), (3), Aug. 10, 1993, 107 Stat. 507, 508; Pub. L. 108–357, title IV, §§ 411(a)(2), 420(a), (c), Oct. 22, 2004, 118 Stat. 1503, 1513, 1514; Pub. L. 109–135, title IV, § 412(jj), Dec. 21, 2005, 119 Stat. 2639; Pub. L. 111–147, title V, § 502(b)(2)(B), Mar. 18, 2010, 124 Stat. 107.)

cite as: 26 USC 881