§ 36.3121(l)(8)-1 Definition of foreign subsidiary. ( a ) *Prior to August 1, 1956.* ( 1 ) For the period January 1, 1955 to July 31, 1956, inclusive, a foreign corporation is a foreign subsidiary of a domestic corporation, within the meaning of the regulations in this part, if— ( i ) More than 50 percent of the voting stock of the foreign corporation is owned by the domestic corporation; or
( ii ) More than 50 percent of the voting stock of the foreign corporation is owned by a second foreign corporation and more than 50 percent of the voting stock of the second foreign corporation is owned by the domestic corporation.
( 2 ) The application of subparagraph (1) of this paragraph may be illustrated by the following examples: Example 1. P, a domestic corporation, owns 51 percent of the voting stock of S-1, a foreign corporation. S-1 owns 51 percent of the voting stock of S-2, a foreign corporation. S-2 owns 51 percent of the voting stock of S-3, a foreign corporation. S-1 and S-2 are foreign subsidiaries of P for purposes of the regulations in this part. Since neither P nor S-1 owns more than 50 percent of the voting stock of S-3, S-3 is not a foreign subsidiary of P within the meaning of the regulations in this part.
Example 2. Assume the same facts as those stated in example *1* except that 25 percent of the voting stock of S-2 is transferred by S-1 to P. P owns no other voting stock of S-2. Accordingly, after the transfer, P and S-1 together own more than 50 percent of the voting stock of S-2, but neither P nor S-1 alone owns more than 50 percent of such stock. S-2 ceases to be a foreign subsidiary of P when such transfer is effected.
( b ) *On or after August 1, 1956.* ( 1 ) Beginning August 1, 1956, a foreign corporation is a foreign subsidiary of a domestic corporation, within the meaning of the regulations in this part, if— ( i ) Not less than 20 percent of the voting stock of the foreign corporation is owned by the domestic corporation; or
( ii ) More than 50 percent of the voting stock of the foreign corporation is owned by a second foreign corporation and not less than 20 percent of the voting stock of the second foreign corporation is owned by the domestic corporation.
( 2 ) The application of subparagraph (1) of this paragraph may be illustrated by the following examples: Example 1. P, a domestic corporation owns 20 percent of the voting stock of S-1, a foreign corporation. S-1 is, therefore, a foreign subsidiary of P. S-1 owns 51 percent and P owns 15 percent of the voting stock of S-2, a foreign corporation. S-2 is also a foreign subsidiary of P, and this would be so even if P owned none of the voting stock of S-2. S-2 owns 51 percent, S-1 owns 39 percent, and P owns 10 percent of the voting stock of S-3, a foreign corporation. Since P owns less than 20 percent of the voting stock of S-2 and less than 20 percent of the voting stock of S-3, and since S-1 owns not more than 50 percent of the voting stock of S-3, S-3 is not a foreign subsidiary of P within the meaning of the regulations in this part.
Example 2. Assume the same facts as those stated in example *1* except that 4 percent of the voting stock of S-2 is transferred by S-1 to P. After, as well as before, the transfer of 66 percent of the voting stock of S-2 is owned by P and S-1 together. After the transfer, however, P owns less than 20 percent and S-1 owns not more than 50 percent of the voting stock of S-2. When such transfer is effected S-2 ceases to be a foreign subsidiary of P for purposes of the regulations in this part.
( c ) *Transfer of stock ownership.* The transfer of the voting stock of a foreign corporation which is a foreign subsidiary of a domestic corporation within the meaning of section 3121(l)(8) will not affect the status of the foreign corporation as such a foreign subsidiary if at all times either of the percentage tests stated in section 3121(l)(8), relating to ownership of the voting stock of such foreign corporation, is met.
( d ) *Meaning of “stock”.* The term “stock”, as used in the regulations in this part, has the meaning assigned by paragraph (7) of section 7701(a). Section 7701(a)(7) provides as follows:
Sec. 7701. *Definitions.* (a) When used in this title [Internal Revenue Code of 1954], where not otherwise distinctly expressed or manifestly incompatible with the intent thereof— (7) *Stock.* The term “stock” includes shares in an association, joint-stock company, or insurance company.
[T.D. 6390, 24 FR 4831, June 13, 1959]