26 C.F.R. § 1.881-5T Exception for certain possessions corporations (temporary).
Title 26 - Internal Revenue
(a) Scope. Section 881(b) and this section provide special rules for the application of sections 881 and 884 to certain corporations created or organized in possessions of the United States. Paragraph (g) of this section provides special rules for the application of sections 881 and 884 to corporations created or organized in the United States for purposes of determining tax liability incurred to certain possessions that administer income tax laws that are identical (except for the substitution of the name of the possession for the term United States where appropriate) to those in force in the United States. See §1.884-0T(b) for special rules relating to the application of section 884 with respect to possessions of the United States. (b) Operative rules. (1) Corporations described in paragraphs (c) and (d) of this section are not treated as foreign corporations for purposes of section 881. Accordingly, they are exempt from the tax imposed by section 881(a). (2) For corporations described in paragraph (e) of this section, the rate of tax imposed by section 881(a) on U.S. source dividends received is 10 percent (rather than the generally applicable 30 percent). (c) U.S.V.I. and section 931 possessions. A corporation created or organized in, or under the law of, the United States Virgin Islands or a section 931 possession is described in this paragraph (c) for a taxable year when the following conditions are satisfied— (1) 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; (2) At least 65 percent of the gross income of such corporation is shown to the satisfaction of the Commissioner upon examination 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 (3) No substantial part of the income of such corporation for the taxable year is used (directly or indirectly) to satisfy obligations to persons who are not bona fide residents of such a possession or the United States. (d) Section 935 possessions. A corporation created or organized in, or under the law of, a section 935 possession is described in this paragraph (d) for a taxable year when the following conditions are satisfied— (1) At all times during such taxable year, less than 25 percent in value of the stock of such corporation is owned (directly or indirectly) by foreign persons; and (2) At least 20 percent of the gross income of such corporation is shown to the satisfaction of the Commissioner upon examination to have been derived from sources within such possession for the 3-year period ending with the close of the preceding taxable year of such corporation (or for such part of such period as the corporation has been in existence). (e) Puerto Rico. A corporation created or organized in, or under the law of, Puerto Rico is described in this paragraph (e) for a taxable year when the conditions of paragraphs (c)(1) through (3) are satisfied (using the language “Puerto Rico” instead of “such a possession”). (f) Definitions and other rules. For purposes of this section: (1) Section 931 possession is defined in §1.931–1T(c)(1). (2) Section 935 possession is defined in §1.935–1T(a)(3)(i). (3) Foreign person means any person other than— (i) A United States person (as defined in section 7701(a)(30) and the regulations thereunder); 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. (4) [Reserved] For more information, see §1.881–5(f)(4). (5) Source. The rules of §1.937–2T shall apply for determining whether income is from sources within a possession. (6) Effectively connected income. The rules of §1.937–3T (other than paragraph (c) of that section) shall apply for determining whether income is effectively connected with the conduct of a trade or business in a possession. (7) Indirect ownership. The rules of section 318(a)(2) shall apply except that the language “5 percent” shall be used instead of “50 percent” in section 318(a)(2)(C). (g) Mirror code jurisdictions. For purposes of applying mirrored section 881 to determine tax liability incurred to a section 935 possession or the United States Virgin Islands— (1) The rules of paragraphs (b) through (d) of this section shall not apply; and (2) A corporation created or organized in, or under the law of, such possession or the United States shall not be considered a foreign corporation. (h) Example. The principles of this section are illustrated by the following example: Example 1. X is a corporation organized under the law of the United States Virgin Islands (USVI) with a branch located in State F. At least 65 percent of the gross income of X is effectively connected with the conduct of a trade or business in the USVI and no substantial part of the income of X for the taxable year is used to satisfy obligations to persons who are not bona fide residents of the United States or the USVI. Seventy-four percent of the stock of X is owned by unrelated individuals who are residents of the United States or the USVI. Y, a corporation organized under the law of State D, and Z, a partnership organized under the law of State F, each own 13 percent of the stock of X. A, an unrelated foreign individual, owns 100 percent of the stock of corporation Y. B and C, unrelated foreign individuals, each own a 50 percent interest in partnership Z. Thus, the condition of paragraph (c)(1) of this section is not satisfied, because 26 percent of X is owned indirectly by foreign persons (A, B, and C). Accordingly, X is treated as a foreign corporation for purposes of section 881. (i) Effective dates. Except as provided in this paragraph (i), this section applies to payments made after April 11, 2005. The rules of paragraphs (b)(2) and (e) apply to dividends paid after October 22, 2004. However, if, on or after October 22, 2004, an increase in the rate of the Commonwealth of Puerto Rico's withholding tax which is generally applicable to dividends paid to United States corporations not engaged in a trade or business in the Commonwealth to a rate greater than 10 percent takes effect, the rules of paragraphs (b)(2) and (e) shall not apply to dividends received on or after the effective date of the increase. [T.D. 9194, 70 FR 18929, Apr. 11, 2005, as amended by T.D. 9248, 71 FR 5001, Jan. 31, 2006]
Title 26: Internal Revenue
PART 1—INCOME TAXES
foreign corporations
§ 1.881-5T Exception for certain possessions corporations (temporary).
