International Tax

Indirect Foreign Tax Credits (Portfolio 6040)

  • This Portfolio contains a detailed analysis of the indirect foreign tax credit system as in effect both before the enactment of the Tax Cuts and Jobs Act (TCJA) (Pub. L. No. 115-97) in 2017. This Portfolio is divided into eleven parts.


Part I of the Portfolio provides a brief overview of both the historical and current operation of the indirect foreign tax credit system through the provisions of former §902 and §960, highlights the significant changes made to the system by the TCJA, and sets forth the general scope of provisions where the operation of the indirect foreign tax credit system may be impacted by the changes made by the TCJA.

Part II contains a detailed analysis of former §902, under which a domestic corporation may have been deemed to have paid, for purposes of the §901 foreign tax credit, foreign income taxes paid by a foreign corporation from which the domestic corporate shareholder received a dividend.

Part III comprehensively addresses the threshold requirements to be met to apply §960, under which a domestic corporation that is taxed on earnings and profits of a controlled foreign corporation under §951 or §951A may be deemed to have paid foreign income taxes paid by the foreign corporation. The TCJA repealed the indirect foreign tax credit under former §902, and significantly amended the deemed paid credit under §960; both changes were effective with respect to taxable years of foreign corporations beginning after 2017.

Part IV examines the annual election provided by §962, which allows a non-corporate domestic shareholder to claim a foreign tax credit through §960 (and former §902) when including an amount in gross income under §951 or §951A.

Parts V through VIII of the Portfolio address other special situations in which an indirect credit may arise or may have arisen under former law, such as when a U.S. shareholder or a controlled foreign corporation sells stock in a controlled foreign corporation and the gain is re-characterized as a dividend under §1248 or §964(e), when a U.S. shareholder or foreign exchanging shareholder is deemed to receive a dividend in a reorganization or other transaction covered by §367(b); when a U.S. shareholder is taxed on income of a passive foreign investment company; and when a U.S. shareholder receives certain distributions from a DISC or a FSC.Part IX examines in detail the interrelationship of the indirect credit rules and the §904 limitation on the foreign tax credit.

Part X of the Portfolio also examines the rules of §78, which require a U.S. shareholder to gross-up a dividend or §951 or §951A inclusion from a foreign corporation by the amount of foreign taxes deemed paid.

Finally, Part XI of the Portfolio examines several collateral issues that arise, including the effect on indirect foreign tax credits of §482 adjustments and refunds or redeterminations of foreign tax.

This Portfolio may be cited as Sotos, Collins, Kriengwatana, and Gibson, 6040 T.M., Indirect Foreign Tax Credits.

Table of Contents

I. Overview of Indirect Foreign Tax Credits

II. Indirect Credit Under Former §902

III. Indirect Credit Under §960

IV. Section 960 Credit for Individuals: Section 962

V. Indirect Credit Under §1248

VI. Indirect Credit Under §367(b)

VII. Indirect Credit for Passive Foreign Investment Company (PFIC) Taxes

VIII. Indirect Credits for Export Subsidiaries

IX. Coordination of Indirect Credits with §904

X. Dividend Gross-Up Under §78

XI. Collateral Issues

David Sotos
Principal, National Tax Services
Martin Collins
Tax Partner
Micah Gibson
International Tax Director
Prae Kriengwatana headshot
Prae Kriengwatana
Sr. Director, Tax Planning
CBRE | Global Tax
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