dividends received from each of such first-tier corporations. (6) Information to be furnished. If the credit for foreign income taxes claimed under section 901 includes taxes deemed, under subparagraphs (2) and (3) of this paragraph, to be paid, the taxpayer must furnish the same information with respect to such taxes as it is required to furnish with respect to the taxes actually paid or accrued by it and for which credit is claimed. See § 1.905-2. For other information required to be furnished by the domestic shareholder for the annual accounting period of certain foreign corporations ending with or within such shareholder's taxable year, see section 6038 and § 1.6038-2. (7) Use of credit limited. Any taxes deemed, under subparagraphs (2) and (3) of this paragraph, to be paid by the domestic shareholder shall be deemed to be paid by such shareholder only for purposes of the foreign tax credit allowed under section 901. See § 1.904-1 for other limitations on the amount of the credit. Further, see the regulations under sections 960, 962, and 963, for special rules relating to the application of section 902 in computing the foreign tax credit of United States shareholders of controlled foreign corporations. (8) Gross-up of dividends deemed paid. Any taxes deemed, under section 902(a) (1) and subparagraph (2) of this paragraph, to have been paid by a domestic shareholder for the taxable year shall be included in the gross income of such shareholder as dividends for such taxable year pursuant to section 78 and § 1.78-1. (b) First-tier corporation owning stock in a second-tier corporation (1) In general. For purposes of applying section 902(a) and paragraph (a) (2) and (3) of this section, if a first-tier corporation receives dividends in any taxable year from its second-tier corporation (meaning for purposes of section 902 a foreign corporation at least 50 percent of the voting stock of which is owned by such first-tier corporation), the foreign income taxes deemed to be paid by the first-tier corporation on or with respect to its own accumulated profits for such year shall be the amount determined in accordance with subparagraphs (2) and (3) of this paragraph. (2) First-tier corporation which is not a less developed country corporation. A first-tier corporation which is not a less developed country corporation, as defined in § 1.902-4, for its taxable year in which it receives dividends from its second-tier corporation shall be deemed to have paid for such year the same proportion of any foreign income taxes paid or accrued by its second-tier corporation on or with respect to the accumulated profits, as defined in paragraph (c)(3) (i) of this section, for the taxable year of the second-tier corporation from which such dividends are paid which the amount of such dividends bears to the amount by which such accumulated profits of the second-tier corporation exceed the taxes so paid or accrued. This rule shall apply whether or not the second-tier corporation is a less developed country corporation for its taxable year. For determining the amount of the foreign income taxes paid or accrued by such second-tier corporation on or with respect to the accumulated profits for the taxable year of such second-tier corporation, see paragraph (c) (4) of this section. (3) First-tier corporation which is a less developed country corporation. A first-tier corporation which is a less developed country corporation, as defined in § 1.902-4, for its taxable year in which it receives dividends from its second-tier corporation shall be deemed to have paid for such year the same proportion of any foreign income taxes paid or accrued by its second-tier corporation on or with respect to the accumulated profits, as defined in paragraph (c) (3)(ii) of this section, for the taxable year of the second-tier corporation from which such dividends are paid which the amount of such dividends bears to the amount of such accumulated profits of the secondtier corporation. This rule shall apply whether or not the second-tier corporation is a less developed country corporation for its taxable year. For determining the amount of the foreign income taxes paid or accrued by such second-tier corporation on or with respect to the accumulated profits of the taxable year of such second-tier corporation, see paragraph (c) (4) of this section. (4) Time for stock ownership by firsttier corporation. The 50-percent stock ownership requirement referred to in subparagraph (1) of this paragraph with respect to a first-tier corporation which in any taxable year receives a dividend from another foreign corporation must be satisfied only at the time such divi dend is received by such first-tier corporation. The application of this subparagraph and paragraph (a) (4) of this section may be illustrated by the following example: Example. On December 1, 1966, foreign corporation A purchases all the one class of stock of foreign corporation B. Both corporations use the calendar year as the taxable year. On December 15, 1966, B Corporation distributes all of its accumulated profits for both 1965 and 1966. On December 20, 1966, A Corporation receives the dividend from B Corporation, and on December 31, 1966, A Corporation sells all the stock in B Corporation. On December 1, 1967, domestic corporation M purchases all the stock of A Corporation. Corporation M uses the calendar year as the taxable year. On December 15, 1967, A Corporation distributes all of its accumulated profits for both 1966 and 1967. On December 20, 1967, M Corporation receives the dividend from A Corporation. Corporation A satisfies the 50-percent stock ownership requirement referred to in subparagraph (1) of this paragraph with respect to B Corporation on December 20, 1966, and M Corporation satisfies the 10-percent stock ownership requirement referred to in paragraph (a)(1) of this section with respect to A Corporation on December 20, 1967. For 1967, M Corporation is entitled to a credit for the foreign income taxes paid by A Corporation for 1966 and 1967 and by B Corporation for 1965 and 1966. (c) Determination of accumulated profits and taxes paid on or with respect thereto (1) First-tier corporation which is not a less developed country corporation. The accumulated profits for any taxable year of a firsttier corporation which is not a less developed country corporation, as defined in § 1.902-4, for such year shall, in accordance with section 902(c) (1) (A), be the sum of (1) The earnings and profits of such corporation for such year, and (ii) The foreign income taxes imposed on or with respect to the gains, profits, and income to which such earnings and profits are attributable. (2) First-tier corporation which is a less developed country corporation. The accumulated profits for any taxable year of a first-tier corporation which is a less developed country corporation, as defined in § 1.902-4, for such year shall, in accordance with section 902(c) (1) (B), be the amount of the earnings and profits of such corporation for such year. (3) Second-tier corporation—(i) Subsidiary of a first-tier corporation which is not a less developed country corporation. If a first-tier corporation is not a less developed country corporation for the taxable year in which it receives dividends from its second-tier corporation, the accumulated profits of the secondtier corporation for its taxable year from which such dividends are paid shall be determined under section 902(c) (1) (A) and by applying the principles of subparagraph (1) of this paragraph, even though such second-tier corporation is a less developed country corporation for such year. (ii) Subsidiary of a first-tier corporation which is a less developed country corporation. If a first-tier corporation is a less developed country corporation for the taxable year in which it receives dividends from its second-tier corporation, the accumulated profits of the second-tier corporation for its taxable year from which such dividends are paid shall be determined under section 902(c) (1) (B) and by applying the principles of subparagraph (2) of this paragraph, even though such second-tier corporation is not a less developed country corporation for such year. (4) Taxes paid on or with respect to accumulated profits of a foreign corporation. For purposes of this section, the amount of foreign income taxes paid or accrued on or with respect to the accumulated profits of a first-tier corporation or second-tier corporation, as the case may be, for any taxable year shall be so much of the foreign income taxes for such year as is properly attributable to such accumulated profits. For such purpose, the foreign income taxes which are properly attributable to the accumulated profits for any taxable year shall be the same proportion of the foreign income taxes imposed on or with respect to the gains, profits, and income for the taxable year as the accumulated profits, as determined under the applicable provision of this paragraph, bear to the total amount of such gains, profits, and income. Since, in applying the preceding sentence to a first-tier corporation which is not a less developed country corporation for the taxable year (and to a second-tier corporation to which subparagraph (3) (i) of this paragraph applies), the accumulated profits, determined in accordance with subparagraph (1) of this paragraph, for the taxable year are always equal to the total amount of the gains, profits, and income for such year, the foreign income taxes imposed on or with respect to such accumulated profits shall be the entire amount of the foreign income taxes paid or accrued for such year on or with respect to such gains, profits, and income. For purposes of this subparagraph, the gains, profits, and income of a foreign corporation for any taxable year shall be determined after reduction by any income, war profits, or excess profits taxes imposed on or with respect to such gains, profits, and income by the United States. (5) Determination of earnings and profits-(i) Taxable year to which section 963 does not apply. For purposes of this section, the earnings and profits of a foreign corporation for any taxable year beginning after December 31, 1962, other than a taxable year to which subdivision (ii) of this subparagraph applies may, if the domestic shareholder chooses, be determined under the rules provided by § 1.964-1 exclusive of paragraphs (d) and (e) of such section. The translation of amounts so determined into United States dollars or other foreign currency shall be made at the proper exchange rate for the date of distribution with respect to which the determination is made. (ii) Taxable year to which section 963 applies. For any taxable year of a foreign corporation with respect to which there applies under paragraph (c) (1) of § 1.963-1 an election by a corporate United States shareholder to exclude from its gross income for the taxable year the subpart F income of a controlled foreign corporation, the earnings and profits of such foreign corporation for such year with respect to such shareholder must be determined, for purposes of this section, under the rules provided by § 1.964-1, even though the amount of the minimum distribution required under paragraph (a) of § 1.963-2 to be received by such shareholder from such earnings and profits of such foreign corporation, or from the consolidated earnings and profits of the chain or group which includes such foreign corporation, is zero. (iii) Time and manner of making choice. The controlling United States shareholders (as defined in paragraph (c) (5) of § 1.964-1) of a foreign corporation shall make the choice referred to in subdivision (i) of this subparagraph (including the elections permitted by paragraphs (b) and (c) of § 1.964-1) by filing a written statement to such effect with the Director of International Operations, Washington, D.C., 20225, within 180 days after the close of the first taxable year of the foreign corporation during which such shareholders receive a distribution of earnings and profits with respect to which the benefits of this section are claimed or on or before November 15, 1965, whichever is later. For purposes of this subdivision, the 180-day period shall commence on the date of receipt of any distribution which is considered paid from the accumulated profits of a preceding year or years under subparagraph (6) of this paragraph. See paragraph (c) (3) (ii) and (iii) of § 1.964-1 for procedures requiring notification of the Director of International Operations and noncontrolling shareholders of action taken. (6) Determination by district director. The district director in whose district is filed the income tax return of the domestic shareholder claiming a credit under section 901 for foreign income taxes deemed, under section 902 and this section, to be paid by such shareholder shall have the power to determine, with respect to a first-tier or a second-tier corporation, from the accumulated profits of what taxable year or years the dividends were paid. In making such determination the district director shall, unless it is otherwise established to his satisfaction, treat any dividends which are paid in the first sixty days of any taxable year of such a corporation as having been paid from the accumulated profits of the preceding taxable year or years of such corporation and shall, in other respects, treat any dividends as having been paid from the most recently accumulated profits. For purposes of this subparagraph, in the case of a firsttier or a second-tier corporation the foreign income taxes of which are determined on the basis of an accounting period of less than 1 year, the term "year" shall mean such accounting period. See sections 441(b) (3) and 443. (d) Source of income from first-tier corporation and country to which tax is deemed paid-(1) Source of income[Reserved] (2) Country to which taxes deemed paid. For purposes of section 904, all foreign income taxes paid, or deemed under paragraph (b) of this section to be paid, by a first-tier corporation shall be deemed to be paid to the foreign country or possession of the United States under the laws of which such first-tier corporation is created or organized. (e) United Kingdom income taxes paid with respect to royalties. A taxpayer shall not be deemed under section 902 and this section to have paid any taxes with respect to which a credit is allowable to such taxpayer or any other taxpayer by virtue of section 905(b). (f) Dividend defined. For the definition of the term "dividend" for purposes of applying section 902 and this section, see section 316. (g) Dividend received. A dividend shall be considered received for purposes of section 902 and this section, when the cash or other property is unqualifiedly made subject to the demands of the distributee. See paragraph § 1.301-1. (b) of (h) Reduction of foreign taxes paid or deemed paid. For reduction of the amount of foreign income taxes paid or deemed paid by a foreign corporation for purposes of section 902 and this section, see section 6038 (b) and the regulations thereunder, relating to failure to furnish information with respect to certain foreign corporations. (i) Illustrations. The application of this section may be illustrated by the following examples: Example (1). Throughout 1965, domestic corporation M owns all the one class of stock of foreign corporation A, not a less developed country corporation. Both corporations use the calendar year as the taxable year. Corporation A has accumulated profits, pays foreign income taxes, and pays dividends for 1965 as summarized below. For 1965, M Corporation is deemed, under paragraph (a) (2) of this section, to have paid $20 of the foreign income taxes paid by A Corporation for 1965 and includes such amount in gross income under section 78 as a dividend, determined as follows: Foreign income taxes included in gross $20 Example (2). The facts are the same as in example (1), except that M Corporation also owns all the one class of stock of foreign corporation B, a less developed country corporation, which also uses the calendar year as the taxable year. Corporation B has accumulated profits, pays foreign income taxes, and pays dividends for 1965 as summarized below. For 1965, M Corporation is deemed, under paragraph (a)(2) of this section, to have paid $20 of the foreign income taxes paid by A Corporation for 1965; is deemed, under paragraph (a)(3) of this section, to have paid $12 of the foreign income taxes paid by B Corporation for 1965; and includes $20 in gross income as 8 dividend under section 78, determined as follows: 60 30 20 Example (3). For 1965, domestic corporation M owns all the one class of stock of foreign corporation A, not a less developed country corporation, which in turn owns all the one class stock of foreign corporation B. All corporations use the calendar year as the taxable year. For 1965, M Corporation is deemed under paragraph (a) (2) of this section to have paid $50 of the foreign income taxes paid, or deemed under paragraph (b) (2) of this section to be paid, by A Corporation for such year and includes such amount in gross income as a dividend Accumlated profits---. 250.00 Foreign income taxes imposed on or with respect to gains, profits, and income__. Accumulated profits. Foreign income taxes paid by A Corporation on or with respect to its accumulated profits (total foreign income taxes). Accumulated profits in excess of foreign taxes__ Foreign income taxes paid, and deemed to be paid, by A Corporation for 1965 on or with respect to its accumulated profits for such year ($60+$40) Dividends paid on December 31, 1965, to M Corporation_ M Corporation (domestic shareholder): Foreign income taxes of A Corporation deemed paid by M Corporation for 1965 under sec. 902(a) (1) ($100 $125/$250). Foreign income taxes included in gross income of M Corporation under sec. 78 as a dividend received from A Corporation---. 50 Example (4). The facts are the same as in example (3), except that A Corporation is a less developed country corporation for 1965. For 1965, M Corporation is deemed under paragraph (a)(3) of this section to have paid $35.24 of the foreign income taxes paid, or deemed under paragraph (b)(3) of this section to be paid, by A Corporation for such year, determined as follows: § 1.902-4 Definition of less developed country corporation for purposes of section 902. (a) In general. For purposes of section 902, a less developed country corporation shall be (1) A foreign corporation which is a less developed country corporation within the meaning of section 955 (c) (1) or (2) and paragraph (a) or (b) of § 1.955-5 for its taxable year; or (2) A foreign corporation which— (i) Owns for its entire taxable year 10 percent or more of the total combined voting power of all classes of stock en |