Academic journal article Journal of Accountancy

Final Branch Profits Regulations

Academic journal article Journal of Accountancy

Final Branch Profits Regulations

Article excerpt

The IRS issued final regulations for the branch profits tax (Internal Revenue Code section 884). The new regulations, effective for tax years beginning on or after October 13, 1992, replace temporary regulations issued in September 1988.

Added as part of the Tax Reform Act of 1986, the branch profits tax generally imposes a 30% tax on earnings by a foreign corporation's U.S. branch to the extent the earnings are not reinvested in assets connected with a U.S. trade or business.

Foreign corporations may obtain rate reductions or exemptions from the tax if there is an income tax treaty between the United States and the corporation's home country. The corporation, however, must meet at least one of three tests proving it is a "qualified resident" of the relevant foreign country. Some of the requirements for satisfying these tests are liberalized under the new regulations.

For example, the "stock ownership and base erosion test" requires more than 50% of the stock of the foreign corporation to be beneficially owned by residents of either the corporation's home country or the United States.

Although certification generally is required to verify residency, the final regulations provide that if a corporation has at least 250 individual shareholders, residency certificates are not required from shareholders who own less than 1% of the corporation's stock.

Under the "publicly traded test," the temporary regulations required 30% of the stock to be traded annually on established securities markets in either the country of residence or the United States. The final regulations adopt rules contained in IRS notice 89-80 that lower this turnover requirement to just 10%.

In addition, under the earlier regulations this test could not be met if 100 or fewer persons owned more than 50% of the corporation's stock. …

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