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($21.60-$21.60).

Reduced foreign tax credit ($19.28-$0.16).
U.S. tax payable for 1963 ($29.12-$19.12)
Overall U.S. and foreign income tax with respect to actual distribution ($17.50+
$3.84+$10).

Allocation of reduction in foreign tax credit to undistributed consolidated 1963
earnings and profits of A and B Corporations to be deemed paid by M Corpora-
tion in future years:

Reduction in foreign tax credit ($19.28-$19.12)__.

Undistributed 1963 consolidated earnings and profits of the chain:

($16.20-$9.36)..

($11.66-$9.60)..

1963-Continued

A B C

Total $19. 12

10.00

31.34

.16

Allocation of reduction in credit:

($6.84/$6.84X$0.16)....

.16

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.16

Foreign income tax attributable to undistributed 1963 earnings and profits of the chain to be taken into account in determining tax deemed paid under sec. 902: ($1.80-$1.04)..

76

($14.40-$14.40).

0

.7

1964

Disbutrition from remaining 1963 consolidated earnings and profits of the chain: ($16.20-$9.36)

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Such amounts as reduced by further foreign income tax imposed on distributions through the chain:

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Taxable income of M Corporation for 1964 attributable to 1964 distribution ($8.08+$1.58)

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Deferred credit in accordance with principles of sec. 902 ($6.84/$6.84 $0.16).
Tax deemed paid under sec. 902 (computed under gross-up above).
U.S. tax payable for 1964 ($5.02-[$0.16+$1.58])--

Example (5). (a) Domestic corporation M directly owns all the one class of stock of each of controlled foreign corporations A, B, C, and D. All such corporations use the calendar year as the taxable year. None of the foreign corporations is a less developed country corporation under section 902(d). For 1963, M Corporation makes a group election with respect to corporations A, B, C, and D and receives from the 1963 consolidated earnings and profits of the group a distribution which is not a pro rata minimum distribution. None of the foreign corporations has earnings and profits for 1964, but the remaining 1963 earnings and profits of the group are distributed late in 1964, for which year it is assumed that the United States corporate income tax rate is the same (52 percent) as for 1963. The overall limitation under section 904(a) (2) on the foreign tax credit applies for both years.

(b) Assume that M Corporation does not comply with the special rules of paragraphs (b) and (c) of this section and that for 1963

it draws a distribution of all of B Corporation's earnings and profits and enough of C Corporation's earnings and profits to receive the amount of a minimum distribution and to assure that the overall United States and foreign income tax for such year with respect to the distribution from the group satisfies the overall minimum tax requirement of paragraph (a) (1) (1) of this section. In such case, the overall United States and foreign income tax for 1963 with respect to the distribution which is made, determined by using the foreign tax credit under section 901 without applying the special credit rules of paragraph (c) of this section, must at least equal $37.44 (90 percent of 52 percent of pretax and predistribution consolidated earnings and profits of $80). Corporation M's United States income tax for 1963 and 1964 with respect to the distribution of the 1963 earnings and profits of the group is determined as follows, based upon the facts assumed:

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Pretax and predistribution earnings and profits (and deficits) of the group. $25.00 $25.00 Consolidated foreign income taxes....

2.50

Consolidated earnings and profits..

12.50 22.50 12.50

C D Total $50.00 ($20.00) $80.00 15.00 30.00 35.00 ($20.00)

Effective foreign tax rate ($30/[$50+$30])

50.00 37.5%

Statutory percentage under sec. 963 (b).

68%

Amount of a minimum distribution (0.68X$50).

$34.00

Tentative distribution..

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($12.93/$35 $15).

Taxable income of M Corporation ($35.43+$8.04).

U.S. tax before foreign tax credit ($43.47X0.52)..

Foreign tax credit (as computed under gross-up above). U.S. tax payable ($22.60-$8.04)...

(c) Assume that M Corporation does comply with the special rules of paragraphs (b) and (c) of this section and for 1963 receives a minimum distribution consisting of $20 from A Corporation and $14 from C Corporation. In such case, the overall United States and foreign income tax for 1963 with respect to the minimum distribution must at least equal the lesser of $37.44 (0.90 × 0.52 × $80) and the overall United States and foreign income tax of $37.89 that would be paid with

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Pretax and predistribution earnings and profits (and deficits) of the group.. $25.00 $25.00 $50.00
Consolidated foreign income taxes..

D Total ($20) $80.00

Consolidated earnings and profits before allocation of deficits..
Allocation of deficit of D Corporation:

2.50 12.50 15.00 22.50 12.50 35.00

30.00

70.00

($22.50/$70-$20).

(6.43)

($12.50/$70X$20).

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($6.07/$8.93X$12.50).

8.50

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(2) Corporation M's United States income tax for 1963 and 1964 with respect to the distribution of the 1963 earnings and profits of the group is determined as follows:

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Example (6).

Throughout 1963, domestic corporation M directly owns all the one class of stock of controlled foreign corporations A, B, and C, and maintains in a foreign country a branch which qualifies under paragraph (f) (4) of § 1.963-1 for inclusion in a group as a wholly owned foreign subsidiary corporation. For 1963, a year for which the overall limitation under section 904(a)(2) on the foreign tax credit applies, M Corporation makes a group election with respect to A, B, and C Corporations and the

foreign branch. All such corporations use the calendar year as the taxable year. The foreign branch has pretax and predistribution earnings and profits of $40 for 1963, as determined under paragraph (f)(4)(ii) of § 1.963-1. None of the foreign corporations is a less developed country corporation under section 902(d). Corporation M complies with the special rules of paragraphs (b) and (c) of this section. The United States income tax of M Corporation for 1963 is as follows, based upon the facts assumed:

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Pretax and predistribution consolidated earnings and profits of the group.. $20.00 $30.00 Consolidated income taxes.

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2.00

15.00

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Effective foreign tax rate ($42/$100).

42%

Statutory percentage under sec. 963(b).

40%

Posttax and predistribution consolidated earnings and profits of the group.. U.S. tax which would be paid on a pro rata minimum distribution from consolidated earnings and profits of the group:

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$58.00

Pro rata minimum distribution (and amount which would be received by M Corporation):

(0.40X$18)

7.20

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Overall U.S. and foreign income tax with respect to a prorata minimum distribution for 1963 ($4+$42).

Tentative tax on distribution actually received by M Corporation:

Actual distribution received.

Gross-up under sec. 78 ($5/$5×$5).

Taxable income of M Corporation ($45+$5)

U.S. tax before foreign tax credit (0.52X$50).

Tentative foreign tax credit ($5, as computed under the gross-up above, plus 100 percent of $20).

Tentative U.S. tax payable ($26-$25)

Insufficient overall U.S. and foreign income tax (the lesser of $46 or $46.80 [0.90X0.52X$100] minus $43 [$1+$42]).

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.80

6.00

2

8.80

40.00

20.80

16.80

4.00

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1.64

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Example (7). Domestic group M, an affiliated group of domestic corporations filing a consolidated return under section 1501, makes a group election for 1963 with respect to a group consisting of two controlled foreign corporations C and D, all of whose one class of stock is directly owned by group M, and foreign branch B, a foreign branch of a Western Hemisphere trade corporation (as defined in section 921) included in group M. No distributions are received for the taxable year from corporations C and D, but the foreign group makes a minimum distribution by reason of the deemed distribution of all of branch B's

earnings and profits. Group M complies with the special rules of paragraphs (b) and (c) of this section. For 1963, a year for which the United States corporate income tax rate is 52 percent, the overall limitation under section 904(a) (2) on the foreign tax credit applies. All corporations use the calendar year as the taxable year. None of the foreign corporations is a less developed country corporation under section 902 (d) for 1963. The income, and the United States and foreign income tax for 1963, are determined as follows, based upon the facts assumed:

Pretax and predistribution consolidated earnings and profits of the foreign group
(before Western Hemisphere trade corporation deduction).
Western Hemisphere trade corporation deduction ($100×0.14/0.52)-.
Pretax and predistribution consolidated earnings and profits of the foreign group
(after Western Hemisphere trade corporation deduction)..

Branch C D Total

$100.00 $10.00 $10.00 $120.00 26.92 26.92

73.08 10.00 10.00 93.08

Consolidated foreign income taxes (38%, 20%, and zero rate, respectively): (0.38X$100)

38.00

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Statutory percentage under sec. 963 (b).

40%

Tax which would be paid with respect to a pro rata minimum distribution from consolidated earnings and profits of the foreign group:

Pro rata minimum distribution:

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(0.54X$4.00).

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Foreign tax credit ($0.80, as computed under the gross-up above, plus 40 percent of $38).

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U.S. tax payable.

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Overall U.S. and foreign income tax with respect to pro rata minimum distribution ($3.52+$40).

43. 52

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Insufficient overall U.S. and foreign income tax (the lesser of $43.52 or $43.56

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Allocation of reduction in foreign tax credit to 1963 undistributed consolidated

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[T.D. 6759, 29 F.R. 13335, Sept. 25, 1964; 29 F.R. 13896, Oct. 8, 1964, as amended by T.D. 6767, 29 F.R. 14878, Nov. 3, 1964]

§ 1.963-5 Foreign corporations with variation in foreign tax rate because of distributions.

(a) Limited application of section. The rules of this section shall apply to a foreign corporation only if

(1) Under the laws of a foreign country or possession of the United States the foreign income tax of the corporation for the taxable year depends upon the extent to which distributions are made by such corporation from its earnings

and profits for the taxable year, so that the rate of such tax for the taxable year on income which is distributed differs from the rate of such tax for such year on the income which is not distributed, and

(2) The corporation

(i) Is a single first-tier corporation, or (ii) Is for the taxable year in a chain or group from which the United States shareholder receives a minimum distribution in respect of which the minimum

overall tax burden is determined in accordance with paragraph (a) (1) (ii) of § 1.963-4.

(b) Foreign income tax determined as though no distributions were made. The foreign income tax on the pretax and predistribution earnings and profits of the foreign corporation for the taxable year shall (solely for the purpose of determining the effective foreign tax rate under paragraph (c) of § 1.963-2) be determined as if the foreign corporation made no distributions for the taxable year. However, notwithstanding the second sentence of paragraph (d) (1) of § 1.963-2, where the United States shareholder owns the stock (with respect to which the election under section 963 is made) in such corporation by reason of stock owned through a chain of ownership described in section 958(a) and the foreign income tax of such corporation for the taxable year decreases as distributions are made from its earnings and profits, the rule in the preceding sentence shall not apply if the electing United States shareholder does not actually receive for the taxable year its proportionate share of the earnings and profits which are actually distributed. In such case, the foreign income tax on pretax and predistribution earnings and profits shall be the actual foreign income tax of such corporation, computed on the basis of the distributions which are made. For example, assume that a second-tier foreign corporation in a chain has pretax and predistribution earnings of $100 for the taxable year and that foreign law imposes on such corporation a foreign income tax of 50 percent of the pretax earnings and profits minus dividends for such year and of 20 percent of such dividends. If the second-tier foreign corporation distributes $20 of earnings and profits to a first-tier foreign corporation which is part of the same chain, and if the first-tier corporation retains the dividend so received, the foreign income tax of the second-tier foreign corporation shall be considered to be the tax actually paid for the taxable year, that is, $44 (50 percent of $80 plus 20 percent of $20). If the first-tier foreign corporation distributes the dividend so received, the foreign income tax of the second-tier foreign corporation shall be considered to be $50 (50 percent of $100). For purposes of this paragraph, the principles of paragraph (b)(3) of § 1.963-4 shall apply.

(c) Minimum distribution (1) Single first-tier corporation. A minimum distribution for a taxable year by a single first-tier corporation described in paragraph (a)(1) of this section shall be a distribution which is equal to

(i) The amount resulting from the multiplication of the statutory percentage specified in paragraph (b) of § 1.963– 2 for such year by the United States shareholder's proportionate share of the earnings and profits of such corporation, as determined under paragraph (d) (2) (i) of 1.963-2 but without the deduction for foreign income tax provided by paragraph (d) (1) (ii) and (iii) of such section, reduced by

(ii) The foreign income tax on the pretax amount determined under subdivision (i) of this subparagraph which would be paid or accrued by such corporation by reason of distributing such amount, less such tax, for such taxable year.

(2) Corporation in a chain or group making a pro rata minimum distribution. In case of a corporation described in paragraph (a) (2) (ii) of this section in a chain or group, such corporation's share of a pro rata minimum distribution by the chain or group for the taxable year shall be

(1) The amount resulting from the multiplication of the statutory percentage specified in paragraph (b) of § 1.9632 for the taxable year by the United States shareholder's proportionate share of the earnings and profits of such corporation, as determined under paragraph (d) (3) of § 1.963-2 but without the deduction for foreign income tax provided by paragraph (d) (1) (ii) and (iii) of such section, reduced by

(ii) The foreign income tax on the pretax amount determined under subdivision (i) of this subparagraph which would be paid or accrued by such corporation by reason of distributing such amount, less such tax, for such taxable year.

(3) A chain or group making a distribution other than a pro rata minimum distribution. If a chain or group contains one or more foreign corporations described in paragraph (a) (2) (ii) of this section and such chain or group makes a minimum distribution other than a pro rata minimum distribution for the taxable year, the amount of such minimum distribution to the electing United States shareholder shall be at least

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