26 USC 884 – Branch profits tax
(a) Imposition of tax
In addition to the tax imposed by section 882 for any taxable year, there is hereby imposed on any foreign corporation a tax equal to 30 percent of the dividend equivalent amount for the taxable year.
(b) Dividend equivalent amount
For purposes of subsection (a), the term “dividend equivalent amount” means the foreign corporation‘s effectively connected earnings and profits for the taxable year adjusted as provided in this subsection:
(1) Reduction for increase in U.S. net equity
If—
(A) the U.S. net equity of the foreign corporation as of the close of the taxable year, exceeds
(B) the U.S. net equity of the foreign corporation as of the close of the preceding taxable year,
the effectively connected earnings and profits for the taxable year shall be reduced (but not below zero) by the amount of such excess.
(2) Increase for decrease in net equity
(A) In general
If—
(i) the U.S. net equity of the foreign corporation as of the close of the preceding taxable year, exceeds
(ii) the U.S. net equity of the foreign corporation as of the close of the taxable year,
the effectively connected earnings and profits for the taxable year shall be increased by the amount of such excess.
(B) Limitation
(i) In general
The increase under subparagraph (A) for any taxable year shall not exceed the accumulated effectively connected earnings and profits as of the close of the preceding taxable year.
(ii) Accumulated effectively connected earnings and profits
For purposes of clause (i), the term “accumulated effectively connected earnings and profits” means the excess of—
(I) the aggregate effectively connected earnings and profits for preceding taxable years beginning after December 31, 1986, over
(II) the aggregate dividend equivalent amounts determined for such preceding taxable years.
(c) U.S. net equity
For purposes of this section—
(1) In general
The term “U.S. net equity” means—
(A) U.S. assets, reduced (including below zero) by
(B) U.S. liabilities.
(2) U.S. assets and U.S. liabilities
For purposes of paragraph (1)—
(A) U.S. assets
The term “U.S. assets” means the money and aggregate adjusted bases of property of the foreign corporation treated as connected with the conduct of a trade or business in the United States under regulations prescribed by the Secretary. For purposes of the preceding sentence, the adjusted basis of any property shall be its adjusted basis for purposes of computing earnings and profits.
(B) U.S. liabilities
The term “U.S. liabilities” means the liabilities of the foreign corporation treated as connected with the conduct of a trade or business in the United States under regulations prescribed by the Secretary.
(C) Regulations to be consistent with allocation of deductions
The regulations prescribed under subparagraphs (A) and (B) shall be consistent with the allocation of deductions under section 882(c)(1).
(d) Effectively connected earnings and profits
For purposes of this section—
(1) In general
The term “effectively connected earnings and profits” means earnings and profits (without diminution by reason of any distributions made during the taxable year) which are attributable to income which is effectively connected (or treated as effectively connected) with the conduct of a trade or business within the United States.
(2) Exception for certain income
The term “effectively connected earnings and profits” shall not include any earnings and profits attributable to—
(A) income not includible in gross income under paragraph (1) or (2) of section 883(a),
(B) income treated as effectively connected with the conduct of a trade or business within the United States under section 921(d) or 926(b) (as in effect before their repeal by the FSC Repeal and Extraterritorial Income Exclusion Act of 2000),
(C) gain on the disposition of a United States real property interest described in section 897(c)(1)(A)(ii),
(D) income treated as effectively connected with the conduct of a trade or business within the United States under section 953(c)(3)(C), or
(E) income treated as effectively connected with the conduct of a trade or business within the United States under section 882(e).
Property and liabilities of the foreign corporation treated as connected with such income under regulations prescribed by the Secretary shall not be taken into account in determining the U.S. assets or U.S. liabilities of the foreign corporation.
(e) Coordination with income tax treaties; etc.
(1) Limitation on treaty exemption
No treaty between the United States and a foreign country shall exempt any foreign corporation from the tax imposed by subsection (a) (or reduce the amount thereof) unless—
(A) such treaty is an income tax treaty, and
(B) such foreign corporation is a qualified resident of such foreign country.
(2) Treaty modifications
If a foreign corporation is a qualified resident of a foreign country with which the United States has an income tax treaty—
(A) the rate of tax under subsection (a) shall be the rate of tax specified in such treaty—
(i) on branch profits if so specified, or
(ii) if not so specified, on dividends paid by a domestic corporation to a corporation resident in such country which wholly owns such domestic corporation, and
(B) any other limitations under such treaty on the tax imposed by subsection (a) shall apply.
(3) Coordination with withholding tax
(A) In general
If a foreign corporation is subject to the tax imposed by subsection (a) for any taxable year (determined after the application of any treaty), no tax shall be imposed by section 871(a), 881(a), 1441, or 1442 on any dividends paid by such corporation out of its earnings and profits for such taxable year.
(B) Limitation on certain treaty benefits
If—
(i) any dividend described in section 861(a)(2)(B) is received by a foreign corporation, and
(ii) subparagraph (A) does not apply to such dividend,
rules similar to the rules of subparagraphs (A) and (B) of subsection (f)(3) shall apply to such dividend.
(4) Qualified resident
For purposes of this subsection—
(A) In general
Except as otherwise provided in this paragraph, the term “qualified resident” means, with respect to any foreign country, any foreign corporation which is a resident of such foreign country unless—
(i) 50 percent or more (by value) of the stock of such foreign corporation is owned (within the meaning of section 883(c)(4)) by individuals who are not residents of such foreign country and who are not United States citizens or resident aliens, or
(ii) 50 percent or more of its income is used (directly or indirectly) to meet liabilities to persons who are not residents of such foreign country or citizens or residents of the United States.
(B) Special rule for publicly traded corporations
A foreign corporation which is a resident of a foreign country shall be treated as a qualified resident of such foreign country if—
(i) the stock of such corporation is primarily and regularly traded on an established securities market in such foreign country, or
(ii) such corporation is wholly owned (either directly or indirectly) by another foreign corporation which is organized in such foreign country and the stock of which is so traded.
(C) Corporations owned by publicly traded domestic corporations
A foreign corporation which is a resident of a foreign country shall be treated as a qualified resident of such foreign country if—
(i) such corporation is wholly owned (directly or indirectly) by a domestic corporation, and
(ii) the stock of such domestic corporation is primarily and regularly traded on an established securities market in the United States.
(D) Secretarial authority
The Secretary may, in his sole discretion, treat a foreign corporation as being a qualified resident of a foreign country if such corporation establishes to the satisfaction of the Secretary that such corporation meets such requirements as the Secretary may establish to ensure that individuals who are not residents of such foreign country do not use the treaty between such foreign country and the United States in a manner inconsistent with the purposes of this subsection.
(5) Exception for international organizations
This section shall not apply to an international organization (as defined in section 7701(a)(18)).
(f) Treatment of interest allocable to effectively connected income
(1) In general
In the case of a foreign corporation engaged in a trade or business in the United States (or having gross income treated as effectively connected with the conduct of a trade or business in the United States), for purposes of this subtitle—
(A) any interest paid by such trade or business in the United States shall be treated as if it were paid by a domestic corporation, and
(B) to the extent that the allocable interest exceeds the interest described in subparagraph (A), such foreign corporation shall be liable for tax under section 881(a) in the same manner as if such excess were interest paid to such foreign corporation by a wholly owned domestic corporation on the last day of such foreign corporation’s taxable year.
To the extent provided in regulations, subparagraph (A) shall not apply to interest in excess of the amounts reasonably expected to be allocable interest.
(2) Allocable interest
For purposes of this subsection, the term “allocable interest” means any interest which is allocable to income which is effectively connected (or treated as effectively connected) with the conduct of a trade or business in the United States.
(3) Coordination with treaties
(A) Payor must be qualified resident
In the case of any interest described in paragraph (1) which is paid or accrued by a foreign corporation, no benefit under any treaty between the United States and the foreign country of which such corporation is a resident shall apply unless—
(i) such treaty is an income tax treaty, and
(ii) such foreign corporation is a qualified resident of such foreign country.
(B) Recipient must be qualified resident
In the case of any interest described in paragraph (1) which is received or accrued by any corporation, no benefit under any treaty between the United States and the foreign country of which such corporation is a resident shall apply unless—
(i) such treaty is an income tax treaty, and
(ii) such foreign corporation is a qualified resident of such foreign country.
(g) Regulations
The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this section, including regulations providing for appropriate adjustments in the determination of the dividend equivalent amount in connection with the distribution to shareholders or transfer to a controlled corporation of the taxpayer‘s U.S. assets and other adjustments in such determination as are necessary or appropriate to carry out the purposes of this section.