Federal Register / Vol. 72, No. 61 / Friday, March 30, 2007 / Proposed Rules 15081 

FDA received a request to extend the 

comment period. FDA believes that 

extending the comment period by 45 

days is appropriate to allow industry to 

generate information on products that 

might be affected by the rule. Therefore, 

FDA is extending the comment period 

until May 14, 2007. This extension will 

provide the public with a total of 105 

days to submit comments. 

II. Comments 

Interested persons may submit to the 

Division of Dockets Management (see 

ADDRESSES) written or electronic 

comments on the proposed rule. Submit 

a single copy of electronic comments or 

two paper copies of any mailed 

comments, except that individuals may 

submit one paper copy. Comments are 

to be identified with the Docket No. 

2005N–0373. Received comments may 

be seen in the Division of Dockets 

Management between 9 a.m. and 4 p.m., 

Monday through Friday. 

Dated: March 23, 2007. 

Jeffrey Shuren, 

Assistant Commissioner for Policy. 

[FR Doc. E7–5894 Filed 3–29–07; 8:45 am] 

BILLING CODE 4160–01–S 

DEPARTMENT OF THE TREASURY 

Internal Revenue Service 

26 CFR Part 1 

[REG–156779–06] 

RIN 1545–BG27 

Determining the Amount of Taxes Paid 

for Purposes of Section 901 

AGENCY: Internal Revenue Service (IRS), 

Treasury. 

ACTION: Notice of proposed rulemaking 

and notice of public hearing. 

SUMMARY: These proposed regulations 

provide guidance relating to the 

determination of the amount of taxes 

paid for purposes of section 901. The proposed regulations affect 

taxpayers that claim direct and indirect 

foreign tax credits. This document also 

provides notice of a public hearing. 

DATES: Written or electronic comments 

must be received by June 28, 2007. 

Outlines of topics to be discussed at the 

public hearing scheduled for July 30, 

2007, at 10 a.m. must be received by 

July 9, 2007. 

ADDRESSES: Send submissions to 

CC:PA:LPD:PR (REG–156779–06), Room 

5203, Internal Revenue Service, P.O. 

Box 7604, Ben Franklin Station, 

Washington, DC 20044. Submissions 

may be hand delivered Monday through 

Friday between the hours of 8 a.m. and 

4 p.m. to CC:PA:LPD:PR (REG–156779–

06), Courier’s Desk, Internal Revenue 

Service, 1111 Constitution Avenue, 

NW., Washington, DC, or sent 

electronically via the Federal 

eRulemaking Portal at http:// 

www.regulations.gov (IRS REG–156779–

06). The public hearing will be held in 

the Auditorium of the Internal Revenue 

Building, 1111 Constitution Avenue, 

NW., Washington, DC. 

FOR FURTHER INFORMATION CONTACT: 

Concerning submission of comments, 

the hearing, and/or to be placed on the 

building access list to attend the 

hearing, Kelly Banks (202) 622–7180; 

concerning the regulations, Bethany A. 

Ingwalson, (202) 622–3850 (not toll-free 

numbers). 

SUPPLEMENTARY INFORMATION: 

Background 

Section 901 of the Internal Revenue 

Code (Code) permits taxpayers to claim 

a credit for income, war profits, and 

excess profits taxes paid or accrued (or 

deemed paid) during the taxable year to 

any foreign country or to any possession 

of the United States. 

Section 1.901–2(a) of the regulations 

defines a tax as a compulsory payment 

pursuant to the authority of a foreign 

country to levy taxes, and further 

provides that a tax is an income, war 

profits, or excess profits tax if the 

predominant character of the tax is that 

of an income tax in the U.S. sense. 

Section 1.901–2(e) provides rules for 

determining the amount of tax paid by 

a taxpayer for purposes of section 901. 

Section 1.901–2(e)(5) provides that an 

amount paid is not a compulsory 

payment, and thus is not an amount of 

tax paid, to the extent that the amount 

paid exceeds the amount of liability 

under foreign law for tax. For purposes 

of determining whether an amount paid 

exceeds the amount of liability under 

foreign law for tax, § 1.901–2(e)(5) 

provides the following rule: 

An amount paid does not exceed the 

amount of such liability if the amount paid 

is determined by the taxpayer in a manner 

that is consistent with a reasonable 

interpretation and application of the 

substantive and procedural provisions of 

foreign law (including applicable tax treaties) 

in such a way as to reduce, over time, the 

taxpayer’s reasonably expected liability 

under foreign law for tax, and if the taxpayer 

exhausts all effective and practical remedies, 

including invocation of competent authority 

procedures available under applicable tax 

treaties, to reduce, over time, the taxpayer’s 

liability for foreign tax (including liability 

pursuant to a foreign tax audit adjustment). 

Section 1.901–2(e)(5) provides further 

that if foreign tax law includes options 

or elections whereby a taxpayer’s 

liability may be shifted, in whole or 

part, to a different year, the taxpayer’s 

use or failure to use such options or 

elections does not result in a 

noncompulsory payment, and that a 

settlement by a taxpayer of two or more 

issues will be evaluated on an overall 

basis, not on an issue-by-issue basis, in 

determining whether an amount is a 

compulsory amount. In addition, it 

provides that a taxpayer is not required 

to alter its form of doing business, its 

business conduct, or the form of any 

transaction in order to reduce its 

liability for tax under foreign law. 

A. U.S.-Owned Foreign Entities 

Commentators have raised questions 

regarding the application of § 1.901–

2(e)(5) to a U.S. person that owns one 

or more foreign entities. In particular, 

commentators have raised questions 

concerning the application of the 

regulation when one foreign entity 

directly or indirectly owned by a U.S. 

person transfers, pursuant to a group 

relief type regime, a net loss to another 

foreign entity, which may or may not 

also be owned by the U.S. person. 

Certain commentators have expressed 

concern that foreign taxes paid by the 

transferor in a subsequent tax year 

might not be compulsory payments to 

the extent the transferor could have 

reduced its liability for those foreign 

taxes had it chosen not to transfer the 

net loss in the prior year. This concern 

arises because the current final 

regulations apply on a taxpayer-bytaxpayer basis, obligating each taxpayer 

to minimize its liability for foreign taxes 

over time, even though the net effect of 

the loss surrender may be to minimize 

the amount of foreign taxes paid in the 

aggregate by the controlled group over 

time. 

Similar questions and concerns arise 

when one or more foreign subsidiaries 

of a U.S. person reach a combined 

settlement with a foreign taxing 

authority that results in an increase in 

the amount of one foreign subsidiary’s 

foreign tax liability and a decrease in 

the amount of a second foreign 

subsidiary’s foreign tax liability. 

B. Certain Structured Passive 

Investment Arrangements 

The IRS and Treasury Department 

have become aware that certain U.S. 

taxpayers are engaging in highly 

structured transactions with foreign 

counterparties in order to generate 

foreign tax credits. These transactions 

are intentionally structured to create a 

foreign tax liability when, removed from 

the elaborately engineered structure, the 

basic underlying business transaction 


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15082 Federal Register / Vol. 72, No. 61 / Friday, March 30, 2007 / Proposed Rules 

generally would result in significantly 

less, or even no, foreign taxes. In 

particular, the transactions purport to 

convert what would otherwise be an 

ordinary course financing arrangement 

between a U.S. person and a foreign 

counterparty, or a portfolio investment 

of a U.S. person, into some form of 

equity ownership in a foreign special 

purpose vehicle (SPV). The transaction 

is deliberately structured to create 

income in the SPV for foreign tax 

purposes, which income is purportedly 

subject to foreign tax. The parties 

exploit differences between U.S. and 

foreign law in order to permit the U.S. 

taxpayer to claim a credit for the 

purported foreign tax payments while 

also allowing the foreign counterparty to 

claim a foreign tax benefit. The U.S. 

taxpayer and the foreign counterparty 

share the cost of the purported foreign 

tax payments through the pricing of the 

arrangement. 

Explanation of Provisions 

The proposed regulations address the 

application of § 1.901–2(e)(5) in cases 

where a U.S. person directly or 

indirectly owns one or more foreign 

entities and in cases in which a U.S. 

person is a party to a highly structured 

passive investment arrangement 

described in this preamble. The 

proposed regulations would treat as a 

single taxpayer for purposes of § 1.901–

2(e)(5) all foreign entities with respect to 

which a U.S. person has a direct or 

indirect interest of 80 percent or more. 

The proposed regulations would treat 

foreign payments attributable to highly 

structured passive investment 

arrangements as noncompulsory 

payments under § 1.901–2(e)(5) and, 

thus, would disallow credits for such 

amounts. 

A. U.S.-Owned Foreign Entities 

Section 1.901–2(e)(5) requires a 

taxpayer to interpret and apply foreign 

law reasonably in such a way as to 

reduce, over time, the taxpayer’s 

reasonably expected liability under 

foreign law for tax. This requirement 

ensures that a taxpayer will make 

reasonable efforts to minimize its 

foreign tax liability even though the 

taxpayer may otherwise be indifferent to 

the imposition of foreign tax due to the 

availability of the foreign tax credit. The 

purpose of this requirement is served if 

all foreign entities owned by such 

person, in the aggregate, satisfy the 

requirements of the regulation. 

Accordingly, for purposes of 

determining compliance with § 1.901–

2(e)(5), the proposed regulations would 

treat as a single taxpayer all foreign 

entities in which the same U.S. person 

has a direct or indirect interest of 80 

percent or more. For this purpose, an 

interest of 80 percent or more means 

stock possessing 80 percent or more of 

the vote and value (in the case of a 

foreign corporation) or an interest 

representing 80 percent or more of the 

income (in the case of non-corporate 

foreign entities). 

The proposed regulations provide that 

if one 80 percent-owned foreign entity 

transfers or surrenders a net loss for the 

taxable year to a second such entity 

pursuant to a foreign law group relief or 

similar regime, foreign tax paid by the 

transferor in a different tax year does 

not fail to be a compulsory payment 

solely because such tax would not have 

been due had the transferor retained the 

net loss and carried it over to such other 

year. Similarly, it provides that if one or 

more 80 percent-owned foreign entities 

enter into a combined settlement under 

foreign law of two or more issues, such 

settlement will be evaluated on an 

overall basis, not on an issue-by-issue or 

entity-by-entity basis, in determining 

whether an amount is a compulsory 

amount. The proposed regulations 

include examples to illustrate the 

proposed rule. 

The IRS and Treasury Department 

intend to monitor structures involving 

U.S.-owned foreign groups, including 

those that would be covered by the 

proposed regulations, to determine 

whether taxpayers are utilizing such 

structures to separate foreign taxes from 

the related income. The IRS and 

Treasury Department may issue 

additional regulations in the future in 

order to address arrangements that 

result in the inappropriate separation of 

foreign tax and income. 

B. Certain Structured Passive 

Investment Arrangements 

The structured arrangements 

discovered and identified by the IRS 

and the Treasury Department can be 

grouped into three general categories: 

(1) U.S. borrower transactions, (2) U.S. 

lender transactions, and (3) asset 

holding transactions. The transactions, 

including the claimed U.S. tax results, 

are described in section B.1 of this 

preamble. Section B.2 of this preamble 

discusses the purpose of the foreign tax 

credit regime and explains why 

allowing a credit in the transactions is 

inconsistent with this purpose. Section 

B.3 of this preamble discusses 

comments the IRS and the Treasury 

Department have received on the 

transactions and describes the proposed 

regulations. The IRS is continuing to 

scrutinize the transactions under 

current law and intends to utilize all 

tools available to challenge the claimed 

U.S. tax results in appropriate cases. 

1. Categories of Structured Passive 

Investment Arrangements 

(a) U.S. borrower transactions. The 

first category consists of transactions in 

which a U.S. person indirectly borrows 

funds from an unrelated foreign 

counterparty. If a U.S. person were to 

borrow funds directly from a foreign 

person, the U.S. person generally would 

make nondeductible principal payments 

and deductible interest payments. The 

U.S. person would not incur foreign tax. 

The foreign lender generally would owe 

foreign tax on its interest income. In a 

structured financing arrangement, the 

U.S. borrower attempts to convert all or 

a portion of its deductible interest 

payments and, in certain cases, its 

nondeductible principal payments into 

creditable foreign tax payments. The 

U.S. borrower’s foreign tax credit benefit 

is shared by the parties through the 

pricing of the arrangement. See Example 

1 of proposed § 1.901–2(e)(5)(iv)(D). 

In a typical structured financing 

arrangement, the loan is made indirectly 

through an SPV. The foreign lender’s 

interest income (and, in many cases, 

other income) is effectively isolated in 

the SPV. The U.S. borrower acquires a 

direct or indirect interest in the SPV and 

asserts that it has a direct or indirect 

equity interest in the SPV for U.S. tax 

purposes. The U.S. borrower claims a 

credit for foreign taxes imposed on the 

income derived by the SPV. The U.S. 

borrower’s purported equity interest 

may be treated as debt for foreign tax 

purposes or it may be treated as an 

equity interest that is owned by the 

foreign lender for foreign tax purposes. 

In either case, the foreign lender is 

treated as owning an equity interest in 

the SPV for foreign tax purposes, which 

entitles the foreign lender to receive taxfree distributions from the SPV. 

For example, assume that a U.S. 

person seeks to borrow $1.5 billion from 

a foreign person. Instead of borrowing 

the funds directly, the U.S. borrower 

forms a corporation (SPV) in the same 

country as the foreign counterparty. The 

U.S. borrower contributes $1.5 billion to 

SPV in exchange for 100 percent of the 

stock of SPV. SPV, in turn, loans the 

entire $1.5 billion to a corporation 

wholly owned by the U.S. borrower. 

The U.S. borrower recovers its $1.5 

billion by selling its entire interest in 

SPV to the foreign counterparty, subject 

to an obligation to repurchase the 

interest in five years for $1.5 billion. 

Each year, SPV earns $120 million of 

interest income from the U.S. borrower’s 

subsidiary. SPV pays $36 million of 

foreign tax and distributes the 


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Federal Register / Vol. 72, No. 61 / Friday, March 30, 2007 / Proposed Rules 15083 

remaining $84 million to the foreign 

counterparty. 

The U.S. borrower takes the position 

that, for U.S. tax purposes, the salerepurchase transaction is a borrowing 

secured by the SPV stock. Accordingly, 

the U.S. borrower asserts that it owns 

the stock of SPV for U.S. tax purposes 

and has an outstanding debt obligation 

to the foreign counterparty. It reports 

the distribution from SPV as dividend 

income and claims indirect credits 

under section 902 for the $36 million of 

foreign taxes paid by SPV. It includes in 

income the cash dividend of $84 million 

paid to the foreign counterparty, plus a 

section 78 gross-up amount of $36 

million, for a total of $120 million. The 

U.S. borrower claims a deduction of $84 

million as interest on its debt obligation 

to the foreign counterparty. In addition, 

the U.S. borrower’s subsidiary claims an 

interest deduction of $120 million. In 

the aggregate, the U.S. borrower and its 

subsidiary claim a foreign tax credit of 

$36 million and an interest expense 

deduction (net of income inclusions) of 

$84 million. 

For foreign tax purposes, the foreign 

counterparty owns the equity of SPV 

and is not subject to additional foreign 

tax upon receipt of the dividend. Thus, 

the net result is that the foreign 

jurisdiction receives foreign tax 

payments attributable to what is in 

substance the lender’s interest income, 

which is consistent with the foreign tax 

results that would be expected from a 

direct borrowing. 

Both parties benefit from the 

arrangement. The foreign lender obtains 

an after-foreign tax interest rate that is 

higher than the after-foreign tax interest 

rate it would earn on a direct loan. The 

U.S. borrower’s funding costs are lower 

on an after-U.S. tax basis (though not on 

a pre-U.S. tax basis) because it has 

converted interest expense into 

creditable foreign tax payments. 

The benefit to the parties is solely 

attributable to the reduction in the U.S. 

borrower’s U.S. tax liability resulting 

from the foreign tax credits claimed by 

the U.S. borrower. The foreign 

jurisdiction benefits from the 

arrangement because the amount of 

interest received by SPV exceeds the 

amount of interest that would have been 

received by the foreign lender if the 

transaction had been structured as a 

direct loan. As a result, the amount paid 

by SPV to the foreign jurisdiction 

exceeds the amount of foreign tax the 

foreign jurisdiction would have 

imposed on the foreign lender’s interest 

income in connection with a direct loan. 

(b) U.S. lender transactions. The 

second category consists of transactions 

in which a U.S person indirectly loans 

funds to an unrelated foreign 

counterparty. If a U.S. person were to 

loan the funds directly to the foreign 

person, the U.S. person generally would 

be subject to U.S. tax on its interest 

income and the borrower would receive 

a corresponding deduction for the 

interest expense. The U.S. person 

generally would not be subject to 

foreign tax other than, in certain 

circumstances, a gross basis 

withholding tax. 

In a typical structured financing 

arrangement, the U.S. person advances 

funds to a foreign borrower indirectly 

through an SPV. The U.S. person asserts 

that its interest in the SPV is equity for 

U.S. tax purposes. Income of the foreign 

borrower (or another foreign 

counterparty) is effectively shifted into 

the SPV. The U.S. person receives cash 

payments from the SPV and claims a 

credit for foreign taxes imposed on the 

income recognized by the SPV for 

foreign tax purposes. The foreign tax 

credits eliminate all or substantially all 

of the U.S. tax the U.S. person would 

otherwise owe on its return and, in 

many cases, U.S. tax the U.S. person 

would otherwise owe on unrelated 

foreign source income. The economic 

cost of the foreign taxes is shared 

through the pricing of the arrangement. 

See Example 4 of proposed § 1.901–

2(e)(5)(iv)(D). 

For example, assume a U.S. person 

seeks to loan $1 billion to a foreign 

person. In lieu of a direct loan, the U.S. 

lender contributes $1 billion to a newlyformed corporation (SPV). The foreign 

counterparty contributes $2 billion to 

SPV, which is organized in the same 

country as the foreign counterparty. SPV 

contributes the total $3 billion to a 

second special purpose entity (RH), 

receiving a 99 percent equity interest in 

RH in exchange. The foreign 

counterparty owns the remaining 1 

percent of RH. RH loans the funds to the 

foreign counterparty in exchange for a 

note that pays interest currently and a 

second zero-coupon note. RH is a 

corporation for U.S. tax purposes and a 

flow-through entity for foreign tax 

purposes. 

Each year, the foreign counterparty 

pays $92 million of interest to RH, and 

RH accrues $113 million of interest on 

the zero-coupon note. RH distributes the 

$92 million of cash it receives to SPV. 

Because RH is a partnership for foreign 

tax purposes, SPV is required to report 

for foreign tax purposes 99 percent 

($203 million) of the income recognized 

by RH. Because RH is a corporation for 

U.S. tax purposes, SPV recognizes only 

the cash distributions of $92 million for 

U.S. tax purposes. SPV pays foreign tax 

of $48 million on its net income (30 

percent of $159 million, or $203 interest 

income less $44 million interest 

deduction) and distributes its remaining 

cash of $44 million to the U.S. lender. 

The U.S. lender takes the position that 

it has an equity interest in SPV for U.S. 

tax purposes. It claims an indirect credit 

for the $48 million of foreign taxes paid 

by SPV. It includes in income the cash 

dividend of $44 million, plus a section 

78 gross-up amount of $48 million. For 

foreign tax purposes, the U.S. lender’s 

interest in SPV is debt, and the foreign 

borrower owns 100 percent of the equity 

of SPV. The foreign counterparty and 

SPV, in the aggregate, have a net 

deduction of $44 million for foreign tax 

purposes. 

Both parties benefit from the 

transaction. The foreign borrower 

obtains ‘‘cheap financing’’ because the 

$44 million of cash distributed to the 

U.S. lender is less than the amount of 

interest it would have to pay on a direct 

loan with respect to which the U.S. 

lender would owe U.S. tax. The U.S. 

lender is better off on an after-U.S. tax 

basis because of the foreign tax credits, 

which eliminate the U.S. lender’s U.S. 

tax on the ‘‘dividend’’ income. 

The benefit to the parties is solely 

attributable to the reduction in the U.S. 

lender’s U.S. tax liability resulting from 

the foreign tax credits claimed by the 

U.S. lender. The foreign jurisdiction 

benefits because the aggregate foreign 

tax result is a deduction for the foreign 

borrower that is less than the amount of 

the interest deduction the foreign 

borrower would have had upon a direct 

loan. 

(c) Asset holding transactions. The 

third category of transactions (‘‘asset 

holding transactions’’) consists of 

transactions in which a U.S. person that 

owns an income-producing asset moves 

the asset into a foreign taxing 

jurisdiction. For example, assume a U.S. 

person owns passive-type assets (such 

as debt obligations) generating an 

income stream that is subject to U.S. tax. 

In an asset holding transaction, the U.S. 

person transfers the assets to an SPV 

that is subject to tax in a foreign 

jurisdiction on the income stream. 

Ordinarily, such a transfer would not 

affect the U.S. person’s after-tax position 

since the U.S. person could claim a 

credit for the foreign tax paid and, 

thereby, obtain a corresponding 

reduction in the amount of U.S. tax it 

would otherwise owe. In the structured 

transactions, however, the cost of the 

foreign tax is shared by a foreign person 

who obtains a foreign tax benefit by 

participating in the arrangement. Thus, 

the U.S. person is better off paying the 

foreign tax instead of U.S. tax because 


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15084 Federal Register / Vol. 72, No. 61 / Friday, March 30, 2007 / Proposed Rules 

it does not bear the full economic 

burden of the foreign tax. 

In a typical structured transaction, a 

foreign counterparty participates in the 

arrangement with the SPV. For example, 

the foreign counterparty may be 

considered to own a direct or indirect 

interest in the SPV for foreign tax 

purposes. The foreign counterparty’s 

participation in the arrangement allows 

it to obtain a foreign tax benefit that it 

would not otherwise enjoy. The foreign 

counterparty compensates the U.S. 

person for this benefit in some manner. 

This compensation, which can be 

viewed as a reimbursement for a portion 

of the foreign tax liability resulting from 

the transfer of the assets, puts the U.S. 

person in a better after-U.S. tax position. 

See Example 7 of proposed § 1.901–

2(e)(5)(iv)(D). 

The benefit to the parties is solely 

attributable to the reduction in the U.S. 

taxpayer’s U.S. tax liability resulting 

from the foreign tax credits claimed by 

the U.S. taxpayer. The foreign 

jurisdiction benefits because the foreign 

taxes purportedly paid by the SPV 

exceed the amount by which the foreign 

counterparty’s taxes are reduced. 

2. Purpose of the Foreign Tax Credit 

The purpose of the foreign tax credit 

is to mitigate double taxation of foreign 

source income. Because the foreign tax 

credit provides a dollar-for-dollar 

reduction in U.S. tax that a U.S. person 

would otherwise owe, the U.S. person 

generally is indifferent, subject to 

various foreign tax credit limitations, as 

to whether it pays foreign tax on its 

foreign source income (if fully offset by 

the foreign tax credit) or whether it pays 

U.S. (and no foreign) tax on that income. 

The structured arrangements 

described in section B.1 of this 

preamble violate this purpose. A 

common feature of all these 

arrangements is that the U.S. person and 

a foreign counterparty share the 

economic cost of the foreign taxes 

claimed as credits by the U.S. person. 

This creates an incentive for the U.S. 

person to subject itself voluntarily to the 

foreign tax because there is a U.S. tax 

motivation to do so. The result is an 

erosion of the U.S. tax base in a manner 

that is not consistent with the purpose 

of the foreign tax credit provisions. 

Although the foreign counterparty 

derives a foreign tax benefit in these 

arrangements, the foreign jurisdiction 

generally is made whole because of the 

payments to the foreign jurisdiction 

made by the special purpose vehicle. In 

fact, the aggregate amount of payments 

to the foreign jurisdictions in 

connection with these transactions 

generally exceeds the amount of foreign 

tax that would have been imposed in 

the ordinary course. Only the U.S. fisc 

experiences a reduction in tax payments 

as a result of the structured 

arrangements. 

The IRS and Treasury Department 

recognize that often there is a business 

purpose for the financing or portfolio 

investment underlying the otherwise 

elaborately engineered transactions. 

However, it is inconsistent with the 

purpose of the foreign tax credit to 

permit a credit for foreign taxes that 

result from intentionally structuring a 

transaction to generate foreign taxes in 

a manner that allows the parties to 

obtain duplicate tax benefits and share 

the cost of the tax payments. The result 

in these structured arrangements is that 

both parties as well as the foreign 

jurisdiction benefit at the expense of the 

U.S. fisc. 

3. Comments and Proposed Regulations 

The IRS and Treasury Department 

have determined that it is not 

appropriate to allow a credit in 

connection with these highly 

engineered transactions where the U.S. 

taxpayer benefits by intentionally 

subjecting itself to foreign tax. The 

proposed regulations would revise 

§ 1.901–2(e)(5) to provide that an 

amount paid to a foreign country in 

connection with such an arrangement is 

not an amount of tax paid. Accordingly, 

under the proposed regulations, a 

taxpayer would not be eligible to claim 

a foreign tax credit for such a payment. 

For periods prior to the effective date of 

final regulations, the IRS will continue 

to utilize all available tools under 

current law to challenge the U.S. tax 

results claimed in connection with such 

arrangements, including the substance 

over form doctrine, the economic 

substance doctrine, debt-equity 

principles, tax ownership principles, 

existing § 1.901–2(e), section 269, and 

the partnership anti-abuse rules of 

§ 1.701–2. 

Certain commentators recommended 

that the IRS and Treasury Department 

adopt a broad anti-abuse rule that would 

deny a foreign tax credit in any case 

where allowance of the credit would be 

inconsistent with the purpose of the 

foreign tax credit regime. Other 

commentators recommended a narrower 

approach that would only deny foreign 

tax credits attributable to transactions 

that include particular features. The IRS 

and Treasury Department are concerned 

that a broad anti-abuse rule would 

create uncertainty for both taxpayers 

and the IRS. The IRS and Treasury 

Department have concluded that, at this 

time, a targeted rule denying foreign tax 

credits in arrangements similar to the 

arrangements described in section B.1 of 

this preamble is more appropriate. 

For periods after the effective date of 

final regulations, the IRS and Treasury 

Department will continue to scrutinize 

other arrangements that are not covered 

by the regulations but are inconsistent 

with the purpose of the foreign tax 

credit. Such arrangements may include 

arrangements that are similar to 

arrangements described in the proposed 

regulations, but that do not meet all of 

the conditions included in the proposed 

regulations. The IRS will utilize all 

available tools, including those 

described above, to challenge the 

claimed U.S. tax results in appropriate 

cases. In addition, the IRS and Treasury 

Department may issue additional 

regulations in the future in order to 

address such other arrangements. 

The proposed regulations would 

retain the general rule in the existing 

regulations that a taxpayer need not 

alter its form of doing business or the 

form of any transaction in order to 

reduce its foreign tax liability. However, 

the proposed regulations would provide 

that, notwithstanding the general rule, 

an amount paid to a foreign country (a 

‘‘foreign payment’’) is not a compulsory 

payment, and thus is not an amount of 

tax paid, if the foreign payment is 

attributable to a structured passive 

investment arrangement. For this 

purpose, the proposed regulations 

would define a structured passive 

investment arrangement as an 

arrangement that satisfies six 

conditions. The six conditions consist of 

features that are common to the three 

types of arrangements identified in 

section B.1 of this preamble. The IRS 

and Treasury Department believe it is 

appropriate to treat foreign payments 

attributable to these arrangements as 

voluntary payments because such 

arrangements are intentionally 

structured to generate the foreign 

payment. 

The first condition is that the 

arrangement utilizes an entity that 

meets two requirements (an ‘‘SPV’’). 

The first requirement is that 

substantially all of the gross income (for 

United States tax purposes) of the entity 

is attributable to passive investment 

income and substantially all of the 

assets of the entity are assets held to 

produce such passive investment 

income. The second requirement is that 

there is a purported foreign tax payment 

attributable to income of the entity. The 

purported foreign tax may be paid by 

the entity itself, by the owner(s) of the 

entity (if the entity is treated as a passthrough entity under foreign law) or by 

a lower-tier entity (if the lower-tier 


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entity is treated as a pass-through entity 

under U.S. law). 

For purposes of this first requirement, 

passive investment income is defined as 

income described in section 954(c), with 

two modifications. The first 

modification is that if the entity is a 

holding company that owns a direct 

equity interest (other than a preferred 

interest) of 10 percent or more in 

another entity (a lower-tier entity) that 

is predominantly engaged in the active 

conduct of a trade or business (or 

substantially all the assets of which 

consist of qualifying equity interests in 

other entities that are predominantly 

engaged in the active conduct of a trade 

or business), passive investment income 

does not include income attributable to 

the interest in such lower-tier entity. 

This exception does not apply if there 

are arrangements under which 

substantially all of the opportunity for 

gain and risk of loss with respect to 

such interest in the lower-tier entity are 

borne by either the U.S. party or the 

counterparty (but not both). 

Accordingly, a direct equity interest in 

any such lower-tier entity is not held to 

produce passive investment income 

provided there are no arrangements 

under which substantially all of the 

entity’s opportunity for gain and risk of 

loss with respect to the lower-tier entity 

are borne by either the U.S. party or the 

counterparty (but not both). This 

modification is based on the notion that 

an entity is not a passive investment 

vehicle of the type targeted by these 

regulations if the entity is a holding 

company for one or more operating 

companies. This modification ensures 

that a joint venture arrangement 

between a U.S. person and a foreign 

person is not treated as a passive 

investment arrangement solely because 

the joint venture is conducted through 

a holding company structure. 

The second modification is that 

passive investment income is 

determined by disregarding sections 

954(c)(3) and (c)(6) and by treating 

income attributable to transactions with 

the counterparties (described in this 

preamble) as ineligible for the 

exclusions under sections 954(h) and (i). 

Sections 954(c)(3) and (c)(6) provide 

exclusions for certain related party 

payments of dividends, interest, rents, 

and royalties. Those exclusions are not 

appropriate for these transactions 

because these transactions can be 

structured utilizing related party 

payments. The modifications to the 

application of sections 954(h) and (i) are 

intended to ensure that income derived 

from the counterparty cannot qualify for 

the exclusion from passive investment 

income, but will not prevent other 

income from qualifying for those 

exclusions. The IRS and Treasury 

Department intend that the structured 

financing arrangements described in 

this preamble do not qualify for the 

active banking, financing or insurance 

business exceptions to the definition of 

passive investment income. Comments 

are requested on whether further 

modifications or clarifications to the 

proposed regulations’ definition of 

passive investment income are 

appropriate to ensure this result. 

The requirement that substantially all 

of the assets of the entity produce 

passive investment income is intended 

to ensure that an entity engaged in an 

active trade or business is not treated as 

an SPV solely because, in a particular 

year, it derives only passive investment 

income. 

The second overall condition is that a 

person (a ‘‘U.S. party’’) would be 

eligible to claim a credit under section 

901(a) (including a credit for foreign 

taxes deemed paid under section 902 or 

960) for all or a portion of the foreign 

payment if such payment were an 

amount of tax paid. Such eligibility to 

claim the credit could arise because the 

U.S. party would be treated as having 

paid or accrued the foreign payment for 

purposes of section 901 if it were an 

amount of tax paid. Alternatively, the 

U.S. party’s eligibility to claim the 

credit could arise because the U.S. party 

owns an equity interest in the SPV or 

another entity that would be treated as 

having paid or accrued the foreign 

payment for purposes of section 901 if 

it were an amount of tax paid. 

The third overall condition is that the 

foreign payment or payments are (or are 

expected to be) substantially greater 

than the amount of credits, if any, that 

the U.S. party would reasonably expect 

to be eligible to claim under section 

901(a) if such U.S. party directly owned 

its proportionate share of the assets 

owned by the SPV other than through a 

branch, a permanent establishment or 

any other arrangement (such as an 

agency arrangement) that would subject 

the income generated by its share of the 

assets to a net basis foreign tax. For 

example, if the SPV owns a note that 

generates interest income with respect 

to which a foreign payment is made, but 

foreign law (including an applicable 

treaty) provides for a zero rate of 

withholding tax on interest paid to nonresidents, the U.S. party would not 

reasonably expect to pay foreign tax for 

which it could claim foreign tax credits 

if it directly owned the note and directly 

earned the interest income. 

The fourth condition is that the 

arrangement is structured in such a 

manner that it results in a foreign tax 

benefit (such as a credit, deduction, 

loss, exemption or a disregarded 

payment) for a counterparty or for a 

person that is related to the 

counterparty, but not related to the U.S. 

party. 

The fifth condition is that the 

counterparty is a person (other than the 

SPV) that is unrelated to the U.S. party 

and that (i) directly or indirectly owns 

10 percent or more of the equity of the 

SPV under the tax laws of a foreign 

country in which such person is subject 

to tax on the basis of place of 

management, place of incorporation or 

similar criterion or otherwise subject to 

a net basis foreign tax or (ii) acquires 20 

percent or more of the assets of the SPV 

under the tax laws of a foreign country 

in which such person is subject to tax 

on the basis of place of management, 

place of incorporation or similar 

criterion or otherwise subject to a net 

basis foreign tax. 

The sixth condition is that the U.S. 

and an applicable foreign country treat 

the arrangement differently under their 

respective tax systems. For this purpose, 

an applicable foreign country is any 

foreign country in which either the 

counterparty, a person related to the 

counterparty (but not related to the U.S. 

party) or the SPV is subject to net basis 

tax. To provide clarity and limit the 

scope of this factor, the proposed 

regulations provide that the 

arrangement must be subject to one of 

four specified types of inconsistent 

treatment. Specifically, the U.S. and the 

foreign country (or countries) must treat 

one or more of the following aspects of 

the arrangement differently, and the 

U.S. treatment of the inconsistent aspect 

must materially affect the amount of 

foreign tax credits claimed, or the 

amount of income recognized, by the 

U.S. party to the arrangement: (i) The 

classification of an entity as a 

corporation or other entity subject to an 

entity-level tax, a partnership or other 

flow-through entity or an entity that is 

disregarded for tax purposes; (ii) the 

characterization as debt, equity or an 

instrument that is disregarded for tax 

purposes of an instrument issued in the 

transaction, (iii) the proportion of the 

equity of the SPV (or an entity that 

directly or indirectly owns the SPV) that 

is considered to be owned directly or 

indirectly by the U.S. party and the 

counterparty; or (iv) the amount of 

taxable income of the SPV for one or 

more tax years during which the 

arrangement is in effect. 

Under the proposed regulations, a 

foreign payment would not be a 

compulsory payment if it is attributable 

to an arrangement that meets the six 

conditions. The proposed regulations 


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15086 Federal Register / Vol. 72, No. 61 / Friday, March 30, 2007 / Proposed Rules 

would treat a foreign payment as 

attributable to such an arrangement if 

the foreign payment is attributable to 

income of the SPV. Such foreign 

payments include a payment by the 

SPV, a payment by the owner of the SPV 

(if the SPV is a pass-through entity 

under foreign law) and a payment by a 

lower-tier entity that is treated as a passthrough entity under U.S. law. For this 

purpose, a foreign payment is not 

treated as attributable to the income of 

the SPV if the foreign payment is a gross 

basis withholding tax imposed on a 

distribution or payment from the SPV to 

the U.S. party. Such taxes could be 

considered to be noncompulsory 

payments because the U.S. party 

intentionally subjects itself to the taxes 

as part of the arrangement. However, the 

IRS and Treasury Department have 

determined that such taxes should not 

be treated as attributable to the 

arrangement because, among other 

reasons, the foreign counterparty 

generally does not derive a duplicative 

foreign tax benefit and, therefore, 

generally does not share the economic 

cost of such taxes. 

The IRS and Treasury Department 

considered excluding all foreign 

payments with respect to which the 

economic cost is not shared from the 

definition of foreign payments 

attributable to the arrangement, but 

determined that such a rule would be 

difficult to administer. The IRS and 

Treasury Department request comments 

on whether it would be appropriate to 

exclude certain foreign payments from 

the definition of foreign taxes 

attributable to the structured passive 

investment arrangement. Comments 

should address the rationale and 

administrable criteria for identifying 

any such exclusions. 

Certain commentators recommended 

that the proposed regulations include a 

requirement that the foreign tax credits 

attributable to the arrangement be 

disproportionate to the amount of 

taxable income attributable to the 

arrangement. This recommendation has 

not been adopted for three reasons. 

First, the IRS and Treasury Department 

were concerned that such a requirement 

would create too much uncertainty and 

would be unduly burdensome for 

taxpayers and the IRS. Second, the 

extent to which interest and other 

expenses, as well as returns on 

borrowed funds and capital, should be 

considered attributable to a particular 

arrangement is not entirely clear. A 

narrow view could present 

opportunities for manipulation, 

especially for financial institutions 

having numerous alternative placements 

of leverage for use within the group, 

while an expansive view could 

undercut the utility of such a test. 

Third, the fundamental concern in these 

transactions is that they create an 

incentive for taxpayers voluntarily to 

subject themselves to foreign tax. This 

concern exists irrespective of whether 

the particular arrangement generates a 

disproportionate amount of foreign tax 

credits. 

The IRS and Treasury Department 

considered whether it would be 

appropriate to permit a taxpayer to treat 

a foreign payment attributable to an 

arrangement that meets the definition of 

a structured passive investment 

arrangement as an amount of tax paid, 

if the taxpayer can show that tax 

considerations were not a principal 

purpose for the structure of the 

arrangement. Alternatively, the IRS and 

Treasury Department considered 

whether it would be appropriate to treat 

a foreign payment as an amount of tax 

paid if a taxpayer shows that there is a 

substantial business purpose for 

utilizing a hybrid instrument or entity, 

which would not include reducing the 

taxpayer’s after-tax costs or enhancing 

the taxpayer’s after-tax return through 

duplicative foreign tax benefits. The IRS 

and Treasury Department determined 

not to include such a rule in these 

proposed regulations due to 

administrability concerns. Comments 

are requested, however, on whether the 

final regulations should include such a 

rule as well as how such a rule could 

be made to be administrable in practice, 

including what reasonably ascertainable 

evidence would be sufficient to 

establish such a substantial non-tax 

business purpose, or the lack of a taxrelated principal purpose. Comments 

should also address whether it would be 

appropriate to adopt a broader antiabuse rule and permit a taxpayer to 

demonstrate that it should not apply. 

C. Effective Date 

The regulations are proposed to be 

effective for foreign taxes paid or 

accrued during taxable years of the 

taxpayer ending on or after the date on 

which the final regulations are 

published in the Federal Register. No 

inference is intended regarding the U.S. 

tax consequences of structured passive 

investment arrangements prior to the 

effective date of the regulations. 

Special Analyses 

It has been determined that this notice 

of proposed rulemaking is not a 

significant regulatory action as defined 

in Executive Order 12866. Therefore, a 

regulatory assessment is not required. It 

also has been determined that section 

553(b) of the Administrative Procedure 

Act (5 U.S.C. chapter 5) does not apply 

to these regulations, and because the 

regulations do not impose a collection 

of information on small entities, the 

Regulatory Flexibility Act (5 U.S.C. 

chapter 6), does not apply. Pursuant to 

section 7805(f) of the Internal Revenue 

Code, this regulation has been 

submitted to the Chief Counsel for 

Advocacy of the Small Business 

Administration for comment on its 

impact on small businesses. 

Comments and Public Hearing 

Before these proposed regulations are 

adopted as final regulations, 

consideration will be given to any 

written (a signed original and eight (8) 

copies) or electronic comments that are 

submitted timely to the IRS. The IRS 

and Treasury Department request 

comments on the clarity of the proposed 

regulations and how they can be made 

easier to understand. All comments will 

be available for public inspection and 

copying. 

A public hearing has been scheduled 

for July 30, 2007, at 10 a.m. in the 

Internal Revenue Building, 1111 

Constitution Avenue, NW., Washington, 

DC. All visitors must present photo 

identification to enter the building. 

Because of access restrictions, visitors 

will not be admitted beyond the 

immediate entrance area more than 30 

minutes before the hearing starts. For 

information about having your name 

placed on the building access list to 

attend the hearing, see the FOR FURTHER

INFORMATION CONTACT section of this 

preamble. 

The rules of 26 CFR 601.601(a)(3) 

apply to the hearing. Persons who wish 

to present oral comments must submit 

electronic or written comments and an 

outline of the topics to be discussed and 

time to be devoted to each topic (a 

signed original and eight (8) copies) by 

July 9, 2007. A period of 10 minutes 

will be allotted to each person for 

making comments. An agenda showing 

the scheduling of the speakers will be 

prepared after the deadline for receiving 

outlines has passed. Copies of the 

agenda will be available free of charge 

at the hearing. 

Drafting Information 

The principal author of these 

regulations is Bethany A. Ingwalson, 

Office of Associate Chief Counsel 

(International). However, other 

personnel from the IRS and the Treasury 

Department participated in their 

development. 

List of Subjects in 26 CFR Part 1 

Income taxes, Reporting and 

recordkeeping requirements. 


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Federal Register / Vol. 72, No. 61 / Friday, March 30, 2007 / Proposed Rules 15087 

Proposed Amendments to the 

Regulations 

Accordingly, 26 CFR part 1 is 

proposed to be amended as follows: 

PART 1—INCOME TAXES 

Paragraph 1. The authority citation 

for part 1 continues to read in part as 

follows: 

Authority: 26 U.S.C. 7805 * * * 

Par. 2. Section 1.901–2 is amended by 

adding paragraphs (e)(5)(iii) and (iv), 

and revising paragraph (h) to read as 

follows: 

§ 1.901–2 Income, war profits, or excess 

profits tax paid or accrued. 

* * * * * 

(e)(5) * * * 

(iii) U.S.-owned foreign entities—(A) 

In general. If a U.S. person described in 

section 901(b) directly or indirectly 

owns stock possessing 80 percent or 

more of the total voting power and total 

value of one or more foreign 

corporations (or, in the case of a noncorporate foreign entity, directly or 

indirectly owns an interest in 80 percent 

or more of the income of one or more 

such foreign entities), the group 

comprising such foreign corporations 

and entities (the ‘‘U.S.-owned group’’) 

shall be treated as a single taxpayer for 

purposes of paragraph (e)(5) of this 

section. Therefore, if one member of 

such a U.S.-owned group transfers or 

surrenders a net loss for the taxable year 

to a second member of the U.S.-owned 

group and the loss reduces the foreign 

tax due from the second member 

pursuant to a foreign law group relief or 

similar regime, foreign tax paid by the 

first member in a different year does not 

fail to be a compulsory payment solely 

because such tax would not have been 

due had the member that transferred or 

surrendered the net loss instead carried 

over the loss to reduce its own income 

and foreign tax liability in that year. 

Similarly, if one or more members of the 

U.S.-owned group enter into a combined 

settlement under foreign law of two or 

more issues involving different 

members of the group, such settlement 

will be evaluated on an overall basis, 

not on an issue-by-issue or entity-byentity basis, in determining whether an 

amount is a compulsory amount. The 

provisions of this paragraph (e)(5)(iii) 

apply solely for purposes of determining 

whether amounts paid are compulsory 

payments of foreign tax and do not, for 

example, modify the provisions of 

section 902 requiring separate pools of 

post-1986 undistributed earnings and 

post-1986 foreign income taxes for each 

member of a qualified group. 

(B) Special rules. All domestic 

corporations that are members of a 

consolidated group (as that term is 

defined in § 1.1502–1(h)) shall be 

treated as one domestic corporation for 

purposes of this paragraph (e)(5)(iii). For 

purposes of this paragraph (e)(5)(iii), 

indirect ownership of stock or another 

equity interest (such as an interest in a 

partnership) shall be determined in 

accordance with the principles of 

section 958(a)(2), whether the interest is 

owned by a U.S. or foreign person. 

(C) Examples. The following 

examples illustrate the rules of this 

paragraph (e)(5)(iii): 

Example 1. (i) Facts. A, a domestic 

corporation, wholly owns B, a country X 

corporation. B, in turn, wholly owns several 

country X corporations, including C and D. 

B, C, and D participate in group relief in 

country X. Under the country X group relief 

rules, a member with a net loss may choose 

to surrender the loss to another member of 

the group. In year 1, C has a net loss of 

(1,000x) and D has net income of 5,000x for 

country X tax purposes. Pursuant to the 

group relief rules in country X, C agrees to 

surrender its year 1 net loss to D and D agrees 

to claim the net loss. D uses the net loss to 

reduce its year 1 net income to 4,000x for 

country X tax purposes, which reduces the 

amount of country X tax D owes in year 1 

by 300x. In year 2, C earns 3,000x with 

respect to which it pays 900x of country X 

tax. Country X permits a taxpayer to carry 

forward net losses for up to ten years. 

(ii) Result. Paragraph (e)(5)(i) of this 

section provides, in part, that an amount paid 

to a foreign country does not exceed the 

amount of liability under foreign law for tax 

if the taxpayer determines such amount in a 

manner that is consistent with a reasonable 

interpretation and application of the 

substantive and procedural provisions of 

foreign law (including applicable tax treaties) 

in such a way as to reduce, over time, the 

taxpayer’s reasonably expected liability 

under foreign law for tax. Under paragraph 

(e)(5)(iii)(A) of this section, B, C, and D are 

treated as a single taxpayer for purposes of 

testing whether the reasonably expected 

foreign tax liability has been minimized over 

time, because A directly and indirectly owns 

100 percent of each of B, C, and D. 

Accordingly, none of the 900x paid by C in 

year 2 fails to be a compulsory payment 

solely because C could have reduced its year 

2 country X tax liability by 300x by choosing 

to carry forward its year 1 net loss to year 2 

instead of surrendering it to D to reduce D’s 

country X liability in year 1. 

Example 2. (i) Facts. L, M, and N are 

country Y corporations. L owns 100 percent 

of the common stock of M, which owns 100 

percent of the stock of N. O, a domestic 

corporation, owns a security issued by M that 

is treated as debt for country Y tax purposes 

and as stock for U.S. tax purposes. As a 

result, L owns 100 percent of the stock of M 

for country Y purposes while O owns 99 

percent of the stock of M for U.S. tax 

purposes. L, M, and N participate in group 

relief in country Y. Pursuant to the group 

relief rules in country Y, M may surrender its 

loss to any member of the group. In year 1, 

M has a net loss of $10 million, N has net 

income of $25 million, and L has net income 

of $15 million. M chooses to surrender its 

year 1 net loss to L. Country Y imposes tax 

of 30 percent on the net income of country 

Y corporations. Accordingly, in year 1, the 

loss surrender has the effect of reducing L’s 

country Y tax by $3 million. In year 1, N 

makes a payment of $7.5 million to country 

Y with respect to its net income of $25 

million. If M had surrendered its net loss to 

N instead of L, N would have had net income 

of $15 million, with respect to which it 

would have owed only $4.5 million of 

country Y tax. 

(ii) Result. M and N, but not L, are treated 

as a single taxpayer for purposes of paragraph 

(e)(5) of this section because O directly and 

indirectly owns 99 percent of each of M and 

N, but owns no direct or indirect interest in 

L. Accordingly, in testing whether M and N’s 

reasonably expected foreign tax liability has 

been minimized over time, L is not 

considered the same taxpayer as M and N, 

collectively, and the $3 million reduction in 

L’s year 1 country Y tax liability through the 

surrender to L of M’s $10 million country Y 

net loss in year 1 is not considered to reduce 

M and N’s collective country Y tax liability. 

(iv) Certain structured passive 

investment arrangements—(A) In 

general. Notwithstanding paragraph 

(e)(5)(i) of this section, an amount paid 

to a foreign country (a ‘‘foreign 

payment’’) is not a compulsory 

payment, and thus is not an amount of 

tax paid, if the foreign payment is 

attributable to an arrangement described 

in paragraph (e)(5)(iv)(B) of this section. 

For purposes of this paragraph (e)(5)(iv), 

a foreign payment is attributable to an 

arrangement described in paragraph 

(e)(5)(iv)(B) of this section if the foreign 

payment is described in paragraph 

(e)(5)(iv)(B)(1)(ii) of this section. 

(B) Conditions. An arrangement is 

described in this paragraph (e)(5)(iv)(B) 

if all of the following conditions are 

satisfied: 

(1) Special purpose vehicle (SPV). An 

entity that is part of the arrangement 

meets the following requirements: 

(i) Substantially all of the gross 

income (for United States tax purposes) 

of the entity is passive investment 

income as defined in paragraph 

(e)(5)(iv)(C)(4) of this section, and 

substantially all of the assets of the 

entity are assets held to produce such 

passive investment income. As provided 

in paragraph (e)(5)(iv)(C)(4)(ii) of this 

section, passive investment income 

generally does not include income of a 

holding company from qualified equity 

interests in lower-tier entities that are 

predominantly engaged in the active 

conduct of a trade or business. Thus, 

except as provided in paragraph 

(e)(5)(iv)(C)(4)(ii) of this section, 


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qualified equity interests of a holding 

company in such lower-tier entities are 

not held to produce passive investment 

income and the ownership of such 

interests will not cause the holding 

company to satisfy this paragraph 

(e)(5)(iv)(B)(1)(i). 

(ii) There is a foreign payment 

attributable to income of the entity (as 

determined under the laws of the 

foreign country to which such foreign 

payment is made), including the entity’s 

share of income of a lower-tier entity 

that is a branch or pass-through entity 

under the laws of such foreign country. 

A foreign payment attributable to 

income of an entity includes a foreign 

payment attributable to income that is 

required to be taken into account by an 

owner of the entity, if the entity is a 

branch or pass-through entity under the 

laws of such foreign country. A foreign 

payment attributable to income of an 

entity also includes a foreign payment 

attributable to income of a lower-tier 

entity that is a branch or pass-through 

entity for U.S. tax purposes. A foreign 

payment attributable to income of the 

entity does not include a withholding 

tax (within the meaning of section 

901(k)(1)(B)) imposed on a distribution 

or payment from the entity to a U.S. 

party (as defined in paragraph 

(e)(5)(iv)(B)(2) of this section). 

(2) U.S. party. A person (a ‘‘U.S. 

party’’) would be eligible to claim a 

credit under section 901(a) (including a 

credit for foreign taxes deemed paid 

under section 902 or 960) for all or a 

portion of the foreign payment 

described in paragraph (e)(5)(iv)(B)(1)(ii) 

of this section if the foreign payment 

were an amount of tax paid. 

(3) Direct investment. The foreign 

payment or payments described in 

paragraph (e)(5)(iv)(B)(1)(ii) of this 

section are (or are expected to be) 

substantially greater than the amount of 

credits, if any, the U.S. party would 

reasonably expect to be eligible to claim 

under section 901(a) for foreign taxes 

attributable to income generated by the 

U.S. party’s proportionate share of the 

assets owned by the SPV if the U.S. 

party directly owned such assets. For 

this purpose, direct ownership shall not 

include ownership through a branch, a 

permanent establishment or any other 

arrangement (such as an agency 

arrangement) that would result in the 

income generated by the U.S. party’s 

proportionate share of the assets being 

subject to tax on a net basis in the 

foreign country to which the payment is 

made. A U.S. party’s proportionate 

share of the assets of the SPV shall be 

determined by reference to such U.S. 

party’s proportionate share of the total 

value of all of the outstanding interests 

in the SPV that are held by its equity 

owners and creditors. 

(4) Foreign tax benefit. The 

arrangement is structured in such a 

manner that it results in a foreign tax 

benefit (such as a credit, deduction, 

loss, exemption or a disregarded 

payment) for a counterparty described 

in paragraph (e)(5)(iv)(B)(5) of this 

section or for a person that is related to 

the counterparty (determined under the 

principles of paragraph (e)(5)(iv)(C)(6) of 

this section by applying the tax laws of 

a foreign country in which the 

counterparty is subject to tax on a net 

basis) but is not related to the U.S. party 

(within the meaning of paragraph 

(e)(5)(iv)(C)(6) of this section). 

(5) Unrelated counterparty. The 

arrangement involves a counterparty. A 

counterparty is a person (other than the 

SPV) that is not related to the U.S. party 

(within the meaning of paragraph 

(e)(5)(iv)(C)(6) of this section) and that 

meets one of the following conditions: 

(i) The person is considered to own 

directly or indirectly 10 percent or more 

of the equity of the SPV under the tax 

laws of a foreign country in which the 

person is subject to tax on the basis of 

place of management, place of 

incorporation or similar criterion or 

otherwise subject to a net basis tax. 

(ii) In a single transaction or series of 

transactions, the person directly or 

indirectly acquires 20 percent or more 

of the value of the assets of the SPV 

under the tax laws of a foreign country 

in which the person is subject to tax on 

the basis of place of management, place 

of incorporation or similar criterion or 

otherwise subject to a net basis tax. For 

purposes of determining the percentage 

of assets of the SPV acquired by the 

person, an asset of the SPV shall be 

disregarded if a principal purpose for 

transferring such asset to the SPV was 

to avoid this paragraph 

(e)(5)(iv)(B)(5)(ii). 

(6) Inconsistent treatment. The U.S. 

and an applicable foreign country (as 

defined in paragraph (e)(5)(iv)(C)(1) of 

this section) treat one or more of the 

following aspects of the arrangement 

differently under their respective tax 

systems, and the U.S. treatment of the 

inconsistent aspect would materially 

affect the amount of income recognized 

by the U.S. party or the amount of 

credits claimed by the U.S. party if the 

foreign payment described in paragraph 

(e)(5)(iv)(B)(1)(ii) of this section were an 

amount of tax paid: 

(i) The classification of the SPV (or an 

entity that has a direct or indirect 

ownership interest in the SPV) as a 

corporation or other entity subject to an 

entity-level tax, a partnership or other 

flow-through entity or an entity that is 

disregarded for tax purposes. 

(ii) The characterization as debt, 

equity or an instrument that is 

disregarded for tax purposes of an 

instrument issued by the SPV (or an 

entity that has a direct or indirect 

ownership interest in the SPV) to the 

U.S. party, the counterparty or a person 

related to the U.S. party or the 

counterparty. 

(iii) The proportion of the equity of 

the SPV (or an entity that directly or 

indirectly owns the SPV) that is 

considered to be owned directly or 

indirectly by the U.S. party and the 

counterparty. 

(iv) The amount of taxable income of 

the SPV for one or more tax years during 

which the arrangement is in effect. 

(C) Definitions—(1) Applicable foreign 

country. An applicable foreign country 

means each foreign country to which a 

foreign payment described in paragraph 

(e)(5)(iv)(B)(1)(ii) of this section is made 

or which confers a foreign tax benefit 

described in paragraph (e)(5)(iv)(B)(4) of 

this section. 

(2) Entity. For purposes of paragraph 

(e)(5)(iv)(B)(1) and (e)(5)(iv)(C)(4) of this 

section, the term entity includes a 

corporation, trust, partnership or 

disregarded entity described in 

§ 301.7701–2(c)(2)(i) of this chapter. 

(3) Indirect ownership. For purposes 

of paragraph (e)(5)(iv) of this section, 

indirect ownership of stock or another 

equity interest (such as an interest in a 

partnership) shall be determined in 

accordance with the principles of 

section 958(a)(2), whether the interest is 

owned by a U.S. or foreign entity. 

(4) Passive investment income—(i) In 

general. For purposes of paragraph 

(e)(5)(iv) of this section, the term 

passive investment income means 

income described in section 954(c), as 

modified by this paragraph 

(e)(5)(iv)(C)(4)(i) and paragraph 

(e)(5)(iv)(C)(4)(ii) of this section. In 

determining whether income is 

described in section 954(c), sections 

954(c)(3) and 954(c)(6) shall be 

disregarded, and sections 954(h) and (i) 

shall be taken into account by applying 

those provisions at the entity level as if 

the entity were a controlled foreign 

corporation (as defined in section 

957(a)). In addition, for purposes of the 

preceding sentence, any income of an 

entity attributable to transactions with a 

person that would be a counterparty (as 

defined in paragraph (e)(5)(iv)(B)(5) of 

this section) if the entity were an SPV, 

or with other persons that are described 

in paragraph (e)(5)(iv)(B)(4) of this 

section and that are eligible for a foreign 

tax benefit described in such paragraph 

(e)(5)(iv)(B)(4), shall not be treated as 


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qualified banking or financing income 

or as qualified insurance income, and 

shall not be taken into account in 

applying sections 954(h) and (i) for 

purposes of determining whether other 

income of the entity is excluded from 

section 954(c)(1) under section 954(h) or 

(i). 

(ii) Income attributable to lower-tier 

entities. Except as provided in this 

paragraph (e)(5)(iv)(C)(4)(ii), income of 

an entity that is attributable to an equity 

interest in a lower-tier entity is passive 

investment income. If the entity is a 

holding company and directly owns a 

qualified equity interest in another 

entity (a ‘‘lower-tier entity’’) that is 

engaged in the active conduct of a trade 

or business and that derives more than 

50 percent of its gross income from such 

trade or business, then none of the 

entity’s income attributable to such 

interest is passive investment income, 

provided that there are no arrangements 

whereby substantially all of the entity’s 

opportunity for gain and risk of loss 

with respect to such interest is borne by 

the U.S. party (or a related person) or 

the counterparty (or a related person), 

but not both parties. For purposes of the 

preceding sentence, an entity is a 

holding company, and is considered to 

be engaged in the active conduct of a 

trade or business and to derive more 

than 50 percent of its gross income from 

such trade or business, if substantially 

all of its assets consist of qualified 

equity interests in one or more entities, 

each of which is engaged in the active 

conduct of a trade or business and 

derives more than 50 percent of its gross 

income from such trade or business and 

with respect to which there are no 

arrangements whereby substantially all 

of the entity’s opportunity for gain and 

risk of loss with respect to such interest 

is borne by the U.S. party (or a related 

person) or the counterparty (or a related 

person), but not both parties. For 

purposes of this paragraph 

(e)(5)(iv)(C)(4)(ii), a lower-tier entity that 

is engaged in a banking, financing, or 

similar business shall not be considered 

to be engaged in the active conduct of 

a trade or business unless the income 

derived by such entity would be 

excluded from section 954(c)(1) under 

section 954(h) or (i), determined by 

applying those provisions at the lowertier entity level as if the entity were a 

controlled foreign corporation (as 

defined in section 957(a)). In addition, 

for purposes of the preceding sentence, 

any income of an entity attributable to 

transactions with a person that would 

be a counterparty (as defined in 

paragraph (e)(5)(iv)(B)(5) of this section) 

if the entity were an SPV, or with other 

persons that are described in paragraph 

(e)(5)(iv)(B)(4) of this section and that 

are eligible for a foreign tax benefit 

described in such paragraph 

(e)(5)(iv)(B)(4), shall not be treated as 

qualified banking or financing income 

or as qualified insurance income, and 

shall not be taken into account in 

applying sections 954(h) and (i) for 

purposes of determining whether other 

income of the entity is excluded from 

section 954(c)(1) under section 954(h) or 

(i). 

(5) Qualified equity interest. With 

respect to an interest in a corporation, 

the term qualified equity interest means 

stock representing 10 percent or more of 

the total combined voting power of all 

classes of stock entitled to vote and 10 

percent or more of the total value of the 

stock of the corporation or disregarded 

entity, but does not include any 

preferred stock (as defined in section 

351(g)(3)). Similar rules shall apply to 

determine whether an interest in an 

entity other than a corporation is a 

qualified equity interest. 

(6) Related person. Two persons are 

related for purposes of paragraph 

(e)(5)(iv) of this section if—

(i) One person directly or indirectly 

owns stock (or an equity interest) 

possessing more than 50 percent of the 

total value of the other person; or 

(ii) The same person directly or 

indirectly owns stock (or an equity 

interest) possessing more than 50 

percent of the total value of both 

persons. 

(7) Special purpose vehicle (SPV). For 

purposes of this paragraph (e)(5)(iv), the 

term SPV means the entity described in 

paragraph (e)(5)(iv)(B)(1) of this section. 

(D) Examples. The following 

examples illustrate the rules of 

paragraph (e)(5)(iv) of this section. No 

inference is intended as to whether a 

taxpayer would be eligible to claim a 

credit under section 901(a) if a foreign 

payment were an amount of tax paid. 

Example 1. U.S. borrower transaction. (i) 

Facts. A domestic corporation (USP) forms a 

country M corporation (Newco), contributing 

$1.5 billion in exchange for 100 percent of 

the stock of Newco. Newco, in turn, loans the 

$1.5 billion to a second country M 

corporation (FSub) wholly owned by USP. 

FSub is engaged in the active conduct of 

manufacturing and selling widgets and 

derives more than 50 percent of its gross 

income from such business. USP then sells 

its entire interest in Newco to a country M 

corporation (FP) for the original purchase 

price of $1.5 billion, subject to an obligation 

to repurchase the interest in five years for 

$1.5 billion. The sale has the effect of 

transferring ownership of the Newco stock to 

FP for country M tax purposes. The salerepurchase transaction is structured in a way 

that qualifies as a collateralized loan for U.S. 

tax purposes. Therefore, USP remains the 

owner of the Newco stock for U.S. tax 

purposes. In year 1, FSub pays Newco $120 

million of interest. Newco pays $36 million 

to country M with respect to such interest 

income and distributes the remaining $84 

million to FP. Under country M law, the $84 

million distribution is excluded from FP’s 

income. FP is not related to USP within the 

meaning of paragraph (e)(5)(iv)(C)(6) of this 

section. Under an income tax treaty between 

country M and the U.S., country M does not 

impose country M tax on interest received by 

U.S. residents from sources in country M. 

(ii) Result. The payment by Newco to 

country M is not a compulsory payment, and 

thus is not an amount of tax paid. First, 

Newco is an SPV because all of Newco’s 

income is passive investment income 

described in paragraph (e)(5)(iv)(C)(4) of this 

section, Newco’s only asset, a note, is held 

to produce such income, and the payment to 

country M is attributable to such income. 

Second, if the foreign payment were treated 

as an amount of tax paid, USP would be 

deemed to pay the foreign payment under 

section 902(a) and, therefore, would be 

eligible to claim a credit for such payment 

under section 901(a). Third, USP would not 

pay any country M tax if it directly owned 

Newco’s loan receivable. Fourth, 

distributions from Newco to FP are exempt 

from tax under country M law. Fifth, FP is 

a counterparty because FP and USP are 

unrelated and FP owns more than 10 percent 

of the stock of Newco under country M law. 

Sixth, FP is the owner of 100 percent of 

Newco’s stock for country M tax purposes, 

while USP is the owner of 100 percent of 

Newco’s stock for U.S. tax purposes, and 

USP’s ownership of the stock would 

materially affect the amount of credits 

claimed by USP if the payment to country M 

were an amount of tax paid. If the foreign 

payment were treated as an amount of tax 

paid, USP’s ownership of the stock for U.S. 

tax purposes would make USP eligible to 

claim a credit for such amount under 

sections 901(a) and 902(a). Because the 

payment to country M is not an amount of 

tax paid, USP has dividend income of $84 

million and is not deemed to pay any country 

M tax under section 902(a). USP also has 

interest expense of $84 million. FSub’s post1986 undistributed earnings are reduced by 

$120 million of interest expense. 

Example 2. U.S. borrower transaction. (i) 

Facts. The facts are the same as in Example 

1, except that FSub is a wholly-owned 

subsidiary of Newco. In addition, FSub 

agrees not to pay, and Newco and FP agree 

not to cause FSub to pay, dividends during 

the five-year period in which FP holds the 

Newco stock subject to the obligation of USP 

to repurchase the stock. 

(ii) Result. The results are the same as in 

Example 1. Although Newco wholly owns 

FSub, which is engaged in the active conduct 

of manufacturing and selling widgets and 

derives more than 50 percent of its income 

from such business, income attributable to 

Newco’s stock in FSub is passive investment 

income because there are arrangements 

whereby substantially all of Newco’s 

opportunity for gain and risk of loss with 

respect to its stock in FSub is borne by USP. 


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See paragraph (e)(iv)(C)(4)(ii) of this section. 

Accordingly, Newco’s stock in FSub is held 

to produce passive investment income. Thus, 

Newco is an SPV because all of Newco’s 

income is passive investment income 

described in paragraph (e)(5)(iv)(C)(4) of this 

section, Newco’s assets are held to produce 

such income, and the payment to country M 

is attributable to such income. 

Example 3. Active business; no SPV. (i) 

Facts. A, a domestic corporation, wholly 

owns B, a country X corporation engaged in 

the manufacture and sale of widgets. On 

January 1, 2008, C, also a country X 

corporation, loans $400 million to B in 

exchange for an instrument that is debt for 

U.S. tax purposes and equity for country X 

tax purposes. As a result, C is considered to 

own 20 percent of the stock of B for country 

X tax purposes. B loans $55 million to D, a 

country Y corporation wholly owned by A. 

For its 2008 tax year, B has $166 million of 

net income attributable to its sales of widgets 

and $3.3 million of interest income 

attributable to the loan to D. Country Y does 

not impose tax on interest paid to 

nonresidents. B makes a payment of $50.8 

million to country X with respect to B’s net 

income. Country X does not impose tax on 

dividend payments between country X 

corporations. A and C are not related within 

the meaning of paragraph (e)(5)(iv)(C)(6) of 

this section. 

(ii) Result. B is not an SPV within the 

meaning of paragraph (e)(5)(iv)(B)(1) of this 

section because the amount of interest 

income received from D does not constitute 

substantially all of B’s income and the $55 

million loan to D does not constitute 

substantially all of B’s assets. Accordingly, 

the $50.8 million payment to country X is not 

attributable to an arrangement described in 

paragraph (e)(5)(iv) of this section. 

Example 4. U.S. lender transaction. (i) 

Facts. (A) A country X corporation (foreign 

bank) contributes $2 billion to a newlyformed country X corporation (Newco) in 

exchange for 100 percent of Newco’s 

common stock. A U.S. bank (USB) 

contributes $1 billion to Newco in exchange 

for securities that are treated as stock of 

Newco for U.S. tax purposes and debt of 

Newco for country X tax purposes. The 

securities represent 10 percent of the total 

voting power of Newco. Newco contributes 

the entire $3 billion to a newly-formed 

country X entity (RH) in exchange for 99 

percent of RH’s equity. Foreign bank owns 

the remaining 1 percent of RH. RH is treated 

as a corporation for U.S. tax purposes and a 

partnership for country X tax purposes. RH 

loans the entire $3 billion it receives from 

Newco to foreign bank in exchange for a note 

that pays interest currently and a zerocoupon note. Under an income tax treaty 

between country X and the U.S., country X 

does not impose country X tax on interest 

received by U.S. residents from sources in 

country X. Country X does not impose tax on 

dividend payments between country X 

corporations. USB and the foreign bank are 

not related within the meaning of paragraph 

(e)(5)(iv)(C)(6) of this section. 

(B) In year 1, foreign bank pays RH $92 

million of interest and accrues $113 million 

of interest on the zero-coupon note. RH 

distributes the $92 million of cash it receives 

to Newco. Newco distributes $44 million to 

USB. Because RH is a partnership for country 

X purposes, Newco is required to report for 

country X purposes 99 percent ($203 million) 

of the income recognized by RH. Newco is 

entitled to interest deductions of $44 million 

for distributions to USB on the securities for 

country X tax purposes and, thus, has $159 

million of net income for country X tax 

purposes. Newco makes a payment to 

country X of $48 million with respect to its 

net income. For U.S. tax purposes, Newco’s 

post-1986 undistributed earnings pool for 

year 1 is $44 million ($92 million–$48 

million). For country X tax purposes, foreign 

bank is entitled to interest expense 

deductions of $205 million. 

(ii) Result. (A) The payment to country X 

is not a compulsory payment, and thus is not 

an amount of tax paid. First, Newco is an 

SPV because all of Newco’s income is passive 

investment income described in paragraph 

(e)(5)(iv)(C)(4) of this section, Newco’s sole 

asset, stock of RH, is held to produce such 

income, and the payment to country X is 

attributable to such income. Second, if the 

foreign payment were treated as an amount 

of tax paid, USB would be deemed to pay the 

$48 million under section 902(a) and, 

therefore, would be eligible to claim a credit 

under section 901(a). Third, USB would not 

pay any country X tax if it directly owned its 

proportionate share of Newco’s asset, the 99 

percent interest in RH, because under the 

U.S.-country X tax treaty country X would 

not impose tax on USB’s distributive share of 

RH’s interest income. Fourth, foreign bank is 

entitled to interest deductions under country 

X law for interest it pays and accrues to RH, 

and will receive tax-free dividends from 

Newco upon payment of the accrued interest. 

Fifth, foreign bank and USB are unrelated 

and foreign bank is considered to own more 

than 10 percent of Newco under country X 

law. Sixth, the U.S. and country X view 

several aspects of the transaction differently, 

and the U.S. treatment would materially 

affect the amount of credits claimed by USB 

if the country X payment were an amount of 

tax paid. If the country X payment were 

treated as an amount of tax paid, the equity 

treatment of the securities for U.S. tax 

purposes would make USB eligible to claim 

a credit for the payment under sections 

901(a) and 902(a). Moreover, the fact that 

Newco recognizes a smaller amount of 

income for U.S. tax purposes than it does for 

country X tax purposes would increase the 

amount of credits USB would be eligible to 

claim upon receipt of the $44 million 

distribution. Because the $48 million 

payment to country X is not an amount of tax 

paid, USB has dividend income of $44 

million. It is not deemed to pay tax under 

section 902(a). 

(B) In addition, RH is an SPV because all 

of RH’s income is passive investment income 

described in paragraph (e)(5)(iv)(C)(4) of this 

section, RH’s sole assets, notes of foreign 

bank, are held to produce such income, and 

Newco’s payment to country X is attributable 

to such income. Second, if the foreign 

payment were treated as an amount of tax 

paid, USB would be deemed to pay the $48 

million under section 902(a) and, therefore, 

would be eligible to claim a credit under 

section 901(a). Third, USB would not pay 

any country X tax if it directly owned its 

proportionate share of RH’s assets, notes of 

foreign bank, because under the U.S.-country 

X tax treaty country X would not impose tax 

on interest paid by foreign bank to USB. 

Fourth, foreign bank is entitled to interest 

deductions under country X law for interest 

it pays and accrues to RH, and will receive 

tax-free dividends from Newco upon 

payment of the accrued interest. Fifth, 

foreign bank and USB are unrelated and 

foreign bank is considered to own directly or 

indirectly more than 10 percent of RH under 

country X law. Sixth, the U.S. and country 

X view several aspects of the transaction 

differently, and the U.S. treatment would 

materially affect the amount of credits 

claimed by USB if the country X payment 

were an amount of tax paid. If the country 

X payment were treated as an amount of tax 

paid, the equity treatment of the Newco 

securities for U.S. tax purposes would make 

USB eligible to claim a credit for the payment 

under sections 901(a) and 902(a). Moreover, 

the entity classification of RH for U.S. tax 

purposes results in Newco recognizing a 

smaller amount of income for U.S. tax 

purposes than it does for country X tax 

purposes, which would increase the amount 

of credits USB would be eligible to claim 

upon receipt of the $44 million distribution. 

Because the $48 million payment to country 

X is not an amount of tax paid, USB has 

dividend income of $44 million. It is not 

deemed to pay tax under section 902(a). 

Example 5. Active business; no SPV. (i) 

Facts. A, a country X corporation, and B, a 

domestic corporation, each contribute $1 

billion to a newly-formed country X entity 

(C) in exchange for stock of C. C is treated 

as a corporation for country X purposes and 

a partnership for U.S. tax purposes. C 

contributes $1.95 billion to a newly-formed 

country X corporation (D) in exchange for 

100 percent of D’s stock. It loans its 

remaining $50 million to D. Accordingly, C’s 

sole assets are stock and debt of D. D uses 

the entire $2 billion to engage in the business 

of manufacturing and selling widgets. For the 

2015 tax year, D derives $300 million of 

income from its widget business and derives 

$2 million of interest income. For the 2015 

tax year, C has dividend income of $200 

million and interest income of $3.2 million 

with respect to its investment in D. Country 

X does not impose tax on dividends received 

by one country X corporation from a second 

country X corporation. C makes a payment of 

$960,000 to country X with respect to C’s net 

income. 

(ii) Result. C’s dividend income is not 

passive investment income, and C’s stock in 

D is not held to produce such income, 

because C owns at least 10 percent of D and 

D derives more than 50 percent of its income 

from the active conduct of its widget 

business. See paragraph (e)(5)(iv)(C)(4)(ii) of 

this section. As a result, less than 

substantially all of C’s income is passive 

investment income and less than 

substantially all of C’s assets are held to 

produce passive investment income. 

Accordingly, C is not an SPV within the 

meaning of paragraph (e)(5)(iv)(B)(1) of this 


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section, and the $960,000 payment to country 

X is not attributable to an arrangement 

described in paragraph (e)(5)(iv) of this 

section. 

Example 6. Active business; no SPV. (i) 

Facts. The facts are the same as in Example 

5, except that instead of loaning $50 million 

to D, C contributes the $50 million to E in 

exchange for 10 percent of the stock of E. E 

is a country Y entity that in not engaged in 

the active conduct of a trade or business. 

Also, for the 2015 tax year, D pays no 

dividends to C, E pays $3.2 million in 

dividends to C, and C makes a payment of 

$960,000 to country X with respect to C’s net 

income. 

(ii) Result. C’s dividend income 

attributable to its stock in E is passive 

investment income, and C’s stock in E is held 

to produce such income. C’s stock in D is not 

held to produce passive investment income 

because C owns at least 10 percent of D and 

D derives more than 50 percent of its income 

from the active conduct of its widget 

business. See paragraph (e)(5)(iv)(C)(4)(ii) of 

this section. As a result, less than 

substantially all of C’s assets are held to 

produce passive investment income. 

Accordingly, C does not meet the 

requirements of paragraph (e)(5)(iv)(B)(1) of 

this section, and the $960,000 payment to 

country X is not attributable to an 

arrangement described in paragraph (e)(5)(iv) 

of this section. 

Example 7. Asset holding transaction. (i) 

Facts. (A) A domestic corporation (USP) 

contributes $6 billion of country Z debt 

obligations to a country Z entity (DE) in 

exchange for all of the class A and class B 

stock of DE. A corporation unrelated to USP 

and organized in country Z (Fcorp) 

contributes $1.5 billion to DE in exchange for 

all of the class C stock of DE. DE uses the 

$1.5 billion contributed by Fcorp to redeem 

USP’s class B stock. The class C stock is 

entitled to ‘‘all’’ income from DE. However, 

Fcorp is obligated immediately to contribute 

back to DE all distributions on the class C 

stock. USP and Fcorp enter into—

(1) A forward contract under which USP 

agrees to buy after five years the class C stock 

for $1.5 billion; and 

(2) An agreement under which USP agrees 

to pay Fcorp interest at a below-market rate 

on $1.5 billion. 

(B) For U.S. tax purposes, these steps 

create a secured loan of $1.5 billion from 

Fcorp to USP. Therefore, for U.S. tax 

purposes, USP is the owner of both the class 

A and class C stock. DE is a disregarded 

entity for U.S. tax purposes and a corporation 

for country Z tax purposes. In year 1, DE 

earns $400 million of interest income on the 

country Z debt obligations. DE makes a 

payment to country Z of $100 million with 

respect to such income and distributes the 

remaining $300 million to Fcorp. Fcorp 

contributes the $300 million back to DE. USP 

and Fcorp are not related within the meaning 

of paragraph (e)(5)(iv)(C)(6) of this section. 

Country Z does not impose tax on interest 

income derived by U.S. residents. 

(C) Country Z treats Fcorp as the owner of 

the class C stock. Pursuant to country Z tax 

law, Fcorp is required to report the $400 

million of income with respect to the $300 

million distribution from DE, but is allowed 

to claim credits for DE’s $100 million 

payment to country Z. For country Z tax 

purposes, Fcorp’s contribution increases its 

basis in the class C stock. When the class C 

stock is later ‘‘sold’’ to USP for $1.5 billion, 

the increase in tax basis will result in a 

country Z tax loss for Fcorp. Each year, the 

amount of the basis increase (and, thus, the 

amount of the loss generated) will be 

approximately $300 million. 

(ii) Result. The payment to country Z is not 

a compulsory payment, and thus is not an 

amount of tax paid. First, DE is an SPV 

because all of DE’s income is passive 

investment income described in paragraph 

(e)(5)(iv)(C)(4) of this section, all of DE’s 

assets are held to produce such income, and 

the payment to country Z is attributable to 

such income. Second, if the payment were 

treated as an amount of tax paid, USP would 

be eligible to claim a credit for such amount 

under section 901(a). Third, USP would not 

pay any country Z tax if it directly owned 

DE’s assets. Fourth, Fcorp is entitled to claim 

a credit under country Z tax law for the 

payment and will recognize a loss under 

country Z law upon the ‘‘sale’’ of the class 

C stock. Fifth, Fcorp and USP are not related 

within the meaning of paragraph 

(e)(5)(iv)(C)(6) of this section and Fcorp is 

considered to own more than 10 percent of 

DE under country Z law. Sixth, the United 

States and country X view certain aspects of 

the transaction differently and the U.S. 

treatment would materially affect the amount 

of credits claimed by USP if the country Z 

payment were an amount of tax paid. USP’s 

ownership of the class C stock for U.S. tax 

purposes would make USP eligible to claim 

a credit for the country Z payment if the 

payment were treated as an amount of tax 

paid. 

* * * * * 

(h) Effective date. Paragraphs (a) 

through (e)(5)(ii) and paragraph (g) of 

this section, § 1.901–2A, and § 1.903–1 

apply to taxable years beginning after 

November 14, 1983. Paragraphs 

(e)(5)(iii) and (iv) of this section are 

effective for foreign taxes paid or 

accrued during taxable years of the 

taxpayer ending on or after the date on 

which these regulations are published 

as final regulations in the Federal 

Register. 

Kevin M. Brown, 

Deputy Commissioner for Services and 

Enforcement. 

[FR Doc. E7–5862 Filed 3–29–07; 8:45 am] 

BILLING CODE 4830–01–P 

DEPARTMENT OF LABOR 

Occupational Safety and Health 

Administration 

29 CFR Part 1910 

[Docket No. OSHA–2007–0021] 

RIN 1218–AC11 

Announcement of Additional 

Stakeholder Meetings on Occupational 

Exposure to Ionizing Radiation 

AGENCY: Occupational Safety and Health 

Administration, Labor. 

ACTION: Announcement of additional 

stakeholder meetings. 

SUMMARY: The Occupational Safety and 

Health Administration (OSHA) invites 

interested parties to participate in or 

observe informal stakeholder meetings 

on Occupational Exposure to Ionizing 

Radiation. These meetings are a 

continuation of OSHA’s information 

collection efforts on ionizing radiation. 

DATES: Stakeholder meetings: The 

stakeholder meeting dates are: 

1. 8:30 a.m.–1 p.m., April 19, 2007, 

Chicago, IL. 

2. 8:30 a.m.–4:30 p.m., April 26, 2007, 

Washington, DC. 

Notice of intention to attend a 

stakeholder meeting: You must submit a 

notice of intention to attend (i.e., to 

participate or observe) the Chicago, IL or 

Washington, DC, stakeholder meeting by 

April 11, 2007. 

ADDRESSES: Stakeholder meetings: The 

stakeholder meeting locations are: 

1. Crown Plaza Chicago O’Hare, 5440 

North River Road, Rosemont, IL 60018. 

2. Frances Perkins Building, U.S. 

Department of Labor, 200 Constitution 

Avenue, NW., Washington, DC 20210. 

Notices of intention to attend a 

stakeholder meeting: You may submit 

your notice of intention to attend (i.e., 

to participate or observe) a stakeholder 

meeting by any of the following 

methods: 

Electronic: OSHA encourages you to 

submit your notice of intention to attend 

to navas.liset@dol.gov. 

Facsimile: You may fax your notice of 

intention to attend to (202) 693–1678. 

Regular mail, express delivery, hand 

delivery, messenger and courier service: 

Submit your notice of intention to 

attend to Liset Navas, OSHA, 

Directorate of Standards and Guidance, 

Room N–3718, U.S. Department of 

Labor, 200 Constitution Avenue, NW., 

Washington, DC 20210; telephone (202) 

693–1950. The Department of Labor’s 

and OSHA’s normal hours of operation 

are 8:15 a.m. to 4:45 p.m., e.t. 

Instructions: For further information 

on the stakeholder meetings and 


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