§ 1.954-1T - Foreign base company income (temporary).

(a) through (c)(1)(i) [Reserved]. For further guidance, see § 1.954-1(a) through (c)(1).

(c)(1)(i) Deductions against gross foreign base company income—(A) In general. [Reserved]. For further guidance, see § 1.954-1(c)(1)(i).

(B) Special rule for deductible payments to certain non-fiscally transparent entities. Notwithstanding any other provision of this section, except as provided in paragraph (c)(1)(i)(C) of this section, an expense (including a distributive share of any expense) that would otherwise be allocable under section 954(b)(5) against the subpart F income of a controlled foreign corporation shall not be allocated against subpart F income of the controlled foreign corporation resulting from the payment giving rise to the expense if—

(1) Such expense arises from a payment between the controlled foreign corporation and a partnership in which the controlled foreign corporation is a partner and the partnership is not regarded as fiscally transparent, as defined in § 1.954-9T(a)(7), by any country in which the controlled foreign corporation does business or has substantial assets; and

(2) The payment from which the expense arises would have met the foreign tax reduction test of § 1.954-9T(a)(3) and the tax disparity test of § 1.954-9T(a)(5)(iv) if those provisions had been applicable to the payment.

(C) Limitations. Paragraph (c)(1)(i)(B) shall not apply to the extent that the controlled foreign corporation partner has no income against which to allocate the expense, other than its distributive share of a payment described in paragraph (c)(1)(i)(B) of this section. Similarly, to the extent an expense described in paragraph (c)(1)(i)(B) of this section exceeds the controlled foreign corporation partner's distributive share of the payment from which the expense arises, such excess amount of the expense may reduce subpart F income (other than such payment) to which it is properly allocable or apportionable under section 954(b)(5).

(D) Example. The following example illustrates the application of paragraph (c)(1)(i)(B) and (C) of this section:

Example.

CFC, a controlled foreign corporation in Country A, is a 70 percent partner in partnership P, located in Country B. Country A's tax laws do not classify P as a fiscally transparent entity. The rate of tax in country B is 15 percent of the tax rate in country A. P loans $100 to CFC at a market rate of interest. In year 1, CFC pays P $10 of interest on the loan. The interest payment would have caused the recharacterization rules of § 1.954-9T to apply if the payment were made between the entities described in § 1.954-9T(a)(2). CFC's distributive share of P's interest income is $7, which is foreign personal holding company income to CFC under section 954(c). Under paragraph (c)(1)(i)(B) of this section, $7 of the $10 interest expense may not be allocated against any of CFC's subpart F income. However, to the extent the remaining $3 of interest expense is properly allocable to subpart F income of CFC other than its distributive share of P's interest income, this expense may offset such other subpart F income.

(E) Effective date. Paragraph (c)(1)(i)(B), (C) and (D) of this section shall apply to all amounts paid or accrued on or after March 23, 1998, except for amounts paid or accrued pursuant to arrangements entered into before March 23, 1998 and not substantially modified (including, for example, by expansion of the arrangement (whether by exercise of an option or otherwise) such as by an increase in the amount of or term of any borrowing, leasing or licensing constituting the arrangement, changes in direct or indirect control of any entity that is a party to the arrangement, or any similar measure which materially increases the tax benefit of the arrangement) on or after March 23, 1998. For rules applicable to amounts paid or accrued pursuant to arrangements entered into before March 23, 1998, see § 1.954-1.

(c)(1)(ii) through (f) [Reserved]. For further guidance, see § 1.954-1(c)(1)(ii) through (f).