International Tax

The Possession Tax Credit Under Section 936 (Portfolio 933)

  • This Portfolio discusses the provisions of former §936, which allowed a credit to domestic corporations for certain business activities in Puerto Rico and the U.S. possessions.


This Bloomberg Tax Portfolio, The Possession Tax Credit Under Section 936, examines, inter alia, the requirements for qualification as a possession corporation (i.e., a U.S. corporation that qualifies for the Puerto Rico and possession tax credit), the tax aspects of doing business as a possession corporation, and the effect of possession corporation status on its shareholders. The Portfolio addresses the intercompany transfer pricing problems that confront possession corporations and their shareholders and affiliates, and provides a detailed discussion of some historic, complex, transfer pricing litigation concerning income from intangible property in the context of Puerto Rico. There is also a review of the history of the U.S. and Puerto Rican tax incentive systems. Finally, the Portfolio discusses the very significant changes made to the possession corporation tax regime by the Revenue Reconciliation Act of 1993, which imposed major limitations on the operation of §936, and the Small Business Job Protection Act of 1996, which repealed §936 subject to a lengthy transitional period.

Table of Contents

I. Introduction
II. Section 936 Prior to the 1993 RRA – In General
III. Intercompany Pricing – General Rule
IV. Intercompany Pricing – Elective Alternatives to the General Rule
V. Other Issues
VI. Limitations on the § 936 Credit Imposed by the 1993 RRA
VII. Phaseout of § 936 Under the 1996 Act
VIII. Sunset of § 936 and the Implications of Terminations; IRS Notice 2005-21

Ernest Aud
Ernie Aud LLC
Murray Gordon
Tax Management Portfolio Authors
David Benson
David Benson
Ernst & Young LLP