(a) Scope. This section applies to an acquisition by a foreign corporation (foreign acquiring corporation) of the assets of another foreign corporation (foreign target corporation) in a transaction described in section 381 (foreign section 381 transaction). This section describes the manner and extent to which earnings and profits and foreign income taxes of the foreign acquiring corporation and the foreign target corporation carry over to the surviving foreign corporation (foreign surviving corporation) and the ordering of distributions by the foreign surviving corporation. See §1.367(b)-9 for special rules governing reorganizations described in section 368(a)(1)(F) and foreign section 381 transactions involving foreign corporations that hold no property and have no tax attributes immediately before the transaction, other than a nominal amount of assets (and related tax attributes).
(b) General rules -
(1)
Non-previously taxed earnings and
profits and related taxes. Earnings and profits and related foreign
income taxes of the foreign acquiring corporation and the foreign target
corporation (pre-transaction earnings and pre-transaction taxes, respectively)
shall carry over to the foreign surviving corporation in the manner described
in paragraphs (d), (e), and (f) of this section. Dividend distributions by the
foreign surviving corporation (post-transaction distributions) shall be out of
earnings and profits and shall reduce related foreign income taxes in the
manner described in paragraph (c) of this section. See paragraph (g) of this
section for rules applicable to taxable years of foreign corporations beginning
on or after January 1, 2018, and taxable years of United States shareholders in
which or with which such taxable years of foreign corporations end ("post-2017
taxable years").
(2)
Previously taxed earnings and profits. [Reserved]
(c) Ordering rule for post-transaction distributions. Dividend distributions out of a foreign surviving corporation's earnings and profits shall be ordered in accordance with the rules of paragraph (c)(1) or (2) of this section, depending on whether the foreign surviving corporation is a pooling corporation or a nonpooling corporation.
(1)
If
foreign surviving corporation is a pooling corporation. In the case of
a foreign surviving corporation that is a pooling corporation, post-transaction
distributions shall be first out of the post-1986 pool (as described in
paragraph (d) of this section) and second out of the pre-pooling annual layers
(as described in paragraph (e)(1) of this section) under an annual last-in
first-out (LIFO) method.
(2)
If foreign surviving corporation is a nonpooling corporation.
In the case of a foreign surviving corporation that is a nonpooling
corporation, post-transaction distributions shall be out of the pre-pooling
annual layers (as described in paragraph (e)(2) of this section) under the LIFO
method.
(d) Post-1986 pool. If the foreign surviving corporation is a pooling corporation, then the post-1986 pool shall be determined under the rules of this paragraph (d).
(1)
In
general -(i)
Qualifying
earnings and taxes. The post-1986 pool shall consist of the post-1986
undistributed earnings and related post-1986 foreign income taxes of the
foreign acquiring corporation and the foreign target corporation.
(ii)
Carryover rule. Subject
to paragraph (d)(2) of this section, the amounts described in paragraph
(d)(1)(i) of this section attributable to the foreign acquiring corporation and
the foreign target corporation shall carry over to the foreign surviving
corporation and shall be combined on a separate category-by-separate category
basis.
(2)
Hovering deficit -(i)
In general. If immediately prior to the foreign section 381
transaction either the foreign acquiring corporation or the foreign target
corporation has a deficit in one or more separate categories of post-1986
undistributed earnings or an aggregate deficit in pre-1987 accumulated profits
such deficit will be a hovering deficit of the foreign surviving corporation
The rules of this paragraph (d)(2) apply to hovering deficits in separate
categories of post-1986 undistributed earnings. See paragraphs (e)(1)(iii) and
(e)(2)(iii) of this section for rules that apply to hovering deficits in
pre-1987 accumulated profits. If the foreign acquiring corporation and the
foreign target corporation each have a post-1986 hovering deficit in the same
separate category of post-1986 undistributed earnings, such deficits and their
related post-1986 foreign income taxes shall be combined for purposes of
applying this paragraph (d)(2). See also paragraphs (f)(1) and (4) of this
section (describing other rules applicable to a deficit described in this
paragraph (d)(2)).
(ii)
Offset rule. A hovering deficit in a separate category of
post-1986 undistributed earnings shall offset only earnings and profits
accumulated by the foreign surviving corporation after the foreign section 381
transaction (post-transaction earnings) in the same separate category of
post-1986 undistributed earnings. For purposes of this rule, however
post-transaction earnings do not include post-1986 undistributed earnings in
the same category that are earned after the foreign section 381 transaction
but are distributed or deemed distributed in the same year they are earned
(that is, that do not become accumulated). The offset shall occur as of the
first day of the foreign surviving corporation's first taxable year following
the year in which the post-transaction earnings accumulated.
(iii)
Related taxes.
Post-1986 foreign income taxes that are related to a hovering deficit in a
separate category of post-1986 undistributed earnings shall only be added to
the foreign surviving corporation's post-1986 foreign income taxes in that
separate category on a pro rata basis as the hovering deficit is absorbed. Pro
rata means in the same proportion as the portion of the hovering deficit that
offsets post-transaction earnings in the separate category under paragraph
(d)(2)(ii) of this section bears to the total amount of the hovering
deficit.
(3)
Examples. The following examples illustrate the rules of this
paragraph (d). The examples assume the following facts: Foreign corporations A
and B are controlled foreign corporations (CFCs) that were incorporated after
December 31, 1986, have always been pooling corporations, and have always had
calendar taxable years. None of the shareholders of foreign corporations A and
B are required to include any amount in income under §1.367(b)-4 as a
result of the foreign section 381 transaction. Foreign corporations A and B
(and all of their respective qualified business units as defined in section
989) maintain a "u" functional currency. Finally, unless otherwise stated, any
post-1986 undistributed earnings in the passive category resulted from a
look-through dividend that was paid by a lower-tier CFC out of earnings
accumulated when the CFC was a noncontrolled section 902 corporation and that
qualified for the subpart F same-country exception under section 954(c)(3)(A)
The examples are as follows:Example
1.
(i)
Facts.
(A) On December 31,
2006, foreign corporations A and B have the following post-1986 undistributed
earnings and post-1986 foreign income taxes:
| Separate
category |
E&P |
Foreign
taxes |
|
Foreign
Corporation A
|
| General |
300u |
$60 |
| Passive |
100u |
40 |
|
|
400u |
$100 |
|
Foreign
Corporation B
|
| General |
300u |
$70 |
(B) On January 1, 2007, foreign corporation B
acquires the assets of foreign corporation A in a reorganization described in
section 368(a)(1)(C). Immediately following the foreign section 381
transaction, foreign surviving corporation is a CFC.
(ii)
Result. Under the rules
described in paragraph (d)(1) of this section, foreign surviving corporation
has the following post-1986 undistributed earnings and post-1986 foreign income
taxes:
| Separate
category |
E&P |
Foreign
taxes |
| General |
600u |
$130 |
| Passive |
100u |
40 |
...
