rom 9735 Computation of Possessions Corporation

OMB No. 1545-0217

(Rev. October 1986) Tax Credit Allowed Under Section 936

Department of the Treasury Expires 9-30-89
Internal Revenue Service > Attach to your tax return

For calendar year 19 or other tax year beginning 119 and ending 19
Name Employer identification number

ERM] Gross income in Applicable Period

Tax year (Use a separate line for each tax year Name of U.S. possession in which trade or Periods in which trade or business was actively
ending with or within your applicable period. Start business was actively conducted ‘conducted ina U.S. possession (Dates are
with the earliest such tax year. See instruction B ) inclusive)
Beginning Ending From— To—
(a) (b) (©) (d) (e)

Gross income during periods shown in columns (d) and (e)

Gross income from the active conduct of a trade or business ina U.S. possession] Gross qualified All other gross income
From sources in US. From all other sources | From sources in Possession source | From sourcesin U.S | From all other sources | From sources in the
possessions outside the U.S. the US. tnvestment income Possessions ‘outside the U.S. US
10m {g) (hy 10} Gi (k) 0)
ry
S
°
€
1 Total gross income in applicable period (add totals of columns (f) through (I)) : 1
2 Gross income in applicable period from sources in U.S. possessions (add total of columns (f), 0, and @). 2
3. Divide line 2 by line 1 (if less than 80%, do not complete Parts I! and I!!). . 3
4 Gross income from the active conduct of a trade or business in a U.S. possession (total of columns, , ©. and (hy). 4
5 Divide line 4 by line 1 (if less than 65% (75% for tax years beginning after 1986), do not complete Parts Iland ill). | 5

Computing the Possessions Corporation Tax Credit
6 Qualified gross income in current year:
(a) From sources outside the U.S. from the active conduct of a trade or business ina U.S.
possession (see instructions). . . we 6(a)
(b) From sources outside the U.S. from the sale or “exchange of substantially all assets
used ina possessions tradeorbusiness . . . . . . ., [S(b)
(c) Gross qualified possession source investment income Se, (6
(d) Amounts received in the U.S. . . . . (6d)
(€) Intangible property income subject to section 936(m)(2). (68)
(f) Other intangible property income (see instructions) , 6(f)
(g) Add lines 6(a), 6(b), and 6(c) .
(h) Add lines 6(d), 6(e), and 6(f) .
(i) Subtract line 6(h) from 6(g)
Applicable deductions (attach schedule):
(a) Cost sharingamount (see instructions) . . ... 2... 2... . {2d
(b) Definitely allocable deductions (see instructions) . . . . ...... . . (2)
(c) Ratable part of deductions not definitely allocable . . 2 2... ee 7)
(d) Total (add lines 7(a), 7(b), and 7(c)). . . . . . |7d)
8 Qualified taxable income before loss adjustments (line é(i) less line (4). it loss, do not complete below. . 8]
9 Loss adjustments (attach schedule):
(a) Current year losses from nonqualified sources (see instructions) . . . . . . . [9(a)
(b) Recapture of prior year overall foreign losses (see instructions) . . . . . . . {9(b)
(c) Net capital loss or short-term capital loss adjustment (see instructions) . . . . . (9)
(d) Total (add lines 9(a), 9(b), and 9(c)) . 2 we. er) [9¢¢)|
10 Qualified taxable income (subtract line 9(d) from line 8). toe toe rat 10
11 Total taxable income from all sources (enter taxable income from your tax return) ree ae 20
12 Adjustments to taxable income from all sources (see instructions) . . . . 1. ee ee ee 12
13 Subtractline 12fromlinelL 2 6 ee LAB
14 Divide line 10 byline13.. 2. a OG

15 Total U.S. income tax against which section 936 credit is allowed (see instruction C) soe ee ee LDS
16 Section 936 credit (multiply line 14 by line 15). Enter here andonyourtaxreturn . . . . . . . . | 16

For Paperwork Reduction Act Notice, see instructions on back. Form 5735 (Rev. 10-86)

N

I]

Mh



Form 5735 (Rev. 10-86)

Summary From Schedule P (see instructions)

17 Enter the total sales of possession products to which each income method applies:

(a) Cost sharing method
(b) Profit split method

18 Enter the total sales of possession products which q

(a) Direct labor test
(b) Value-added test
(c) Alternative test

(d) Start-up test .
(e) None of the above .

_7@
_ (1%

ualify under each business presence test Y I;

, 18@
| 1800)
_ 18)
18(d
~ [18(e)

Instructions

(Section references are to the Internal Revenue
Code, unless otherwise noted)

Paperwork Reduction Act Notice.—We ask for
this information to carry out the Internal Revenue
laws of the United States. We need it to ensure
that taxpayers are complying with these laws and
to allow us to figure and collect the right amount
of tax. You are required to give us this information.
Other Forms That May Be Required.—Use
Form 5712-A, Election and Verification of the
Cost Sharing or Profit Split Method Under Section
936(h)(5), to elect the cost sharing or profit split
method of computing taxable income for these
types of income. Form 57 12-A is also used to
show how possessions corporations satisfied the
“significant business presence test.” This test
must be met before the possessions corporation
can use either the cost sharing or profit split
method. See section 936(h)(5) and the related
regulations for rules concerning the treatment of
intangible and other income.

General Instructions

A. Purpose of Form.—A domestic corporation
that has elected to be treated as a possessions
corporation must attach Form 5735 to its income
tax return for each year that the election is in
effect. Complete Form 5735 to figure the
possessions corporation tax credit under section
936. The credit is allowed against income tax
imposed by Chapter 1. Puerto Rico is a U.S.
possession for purposes of this credit, and for tax
years beginning after 1986, the Virgin Isiands are
also considered a possession.

B. Qualifying for the Credit.—To qualify for the
possessions tax credit, a corporation must:

(1) have filed a valid Form 5712, Election to be
Treated as a Possessions Corporation Under
Section 936;

(2) have derived 80% or more of its gross
income from sources in a U.S. possession during
the applicable period immediately before the tax,
year ended; and

(3) have derived 65% (75% for tax years
beginning after 1986) or more of its gross income
from the active conduct of a trade or business in
a U.S. possession during the applicable period
immediately before the tax year ended.

The “applicable period” is generally the shorter
of 36 months or the period when the corporation
actively conducted a trade or business ina U.S.
possession.

C. Restrictions. —A corporation is ineligible to
take the possessions tax credit for any tax year it
18 a DISC or former DISC, or for any tax year in
which it owns stock in a DISC or FSC or former
DISC or former FSC (section 936(f))

The credit is not allowed against the following
taxes:
© minimum tax on tax preference items (section

56) for tax years beginning before 1987
@ tax on accumulated earnings (section 531)
© personal holding company tax (section 541)
© additional tax for recovery of foreign

expropriation losses (section 1351)

© tax increase on the early disposition of
investment credit property (section 47)

© tax on certain capital gains of S corporations
(section 1374)

D. Where To File.—Attach Form 5735 to your
income tax return and file your return with the
Internal Revenue Service Center, Philadelphia,
PA 19255

Specific Instructions

Follow sections 638, 861-864, and 936 to
determine if the source of gross income,
deductions, and taxable income is in or outside
the U.S. or ina U.S. possession. If you receive
any income in the U.S., regardless of its source,
do not include it as income from sources outside
the U.S. For tax years beginning after 1986,
amounts received in the U.S. may be considered
sourced outside the U.S. if the amounts are from
sources outside the U. S. and received from an
unrelated person in the active conduct of a trade
or business (section 936(b)).

You cannot take a deduction or foreign tax
credit for taxes you paid or accrued to a foreign
country or U.S. possession if any of the income on
which those taxes were paid or accrued is used in
computing the possessions corporation tax credit.

Part I

Column (f).—Enter the gross income from the
active conduct of a trade or business in a U.S.
possession which is from sources in U.S.
possessions. Include amount(s) reported on line
6 of Part Il of Schedule(s) P.

Column (i).—Enter gross qualified possession
source investment income in column (i). Subject
to conditions set forth in regulations, certain
investments in a financial institution for tax years
beginning after 1986 shall be considered
investments for use in Puerto Rico. These
investments must be made in financial institutions
for investments consistent with the goals of the
Caribbean Basin Economic Recovery Act, and
must either be invested in active business assets
ina qualified Caribbean Basin country or invested
in development projects in a qualified Caribbean
Basin country, and the investment must be
authorized by the Government Development Bank
of Puerto Rico. See section 936(d)(4).

Part Il

Line 6(a).—Include amount(s) reported on line 6
of Part Il of Schedule(s) P.

Line 6(b).—Include gross income that came
from sources outside the U.S. from selling or
exchanging substantially all the assets the
possessions corporation used in the active
conduct of its trade or business.

Line 6(f).—Enter the amount of marketing
intangible property income which is associated
with any product(s) subject to the cost sharing
method and which is not included in the gross
income of a shareholder because such a
shareholder is a foreign person or a tax-exempt
USS. person. See regulations section 1.936-
6(a)(5).

Line 7(a).—Include the sum of all cost sharing
amounts entered on line 7 of Part | of,
Schedule(s) P if the cost sharing method applies.

Line 7(b).—Include all amounts entered on line
7 of Part Il of Schedule(s) P. Also include the
reduction for the “rate differential portion” (as
defined in section 904(b)(3)(F)) of any net
capital gain that comes from a foreign source and
1s included on line 6(i). Also include the
corporation's other definitely allocable
deductions.

Line 7(c).—Enter on line 7(c) the ratable part of
deductions that cannot be definitely allocated to
qualified income. To obtain this figure, reduce
the deductions by the amount entered on line
7(b). Multiply this result by the amount obtained
when you divide the amount entered on line 6(')
by the gross income on your income tax return.

Line 9(a).—If you sustain a loss for the current
year in the U.S. or on any type of income for
which a separate foreign tax credit limit applies,
allocate the loss to possessions income that
qualifies for the credit in proportion to the ratio of
that income to total taxable income, excluding
the loss.

Line 9(b).—If you sustain an overall foreign loss
in any year, the loss is recaptured in later tax
years by treating part of your taxable income from
sources outside the U.S. as income from sources
inthe U.S. (section 904(f)).

Line 9(c).—To the extent any net capital loss or
short-term capital loss from sources outside the
USS. is used to determine capital gain net income,
itis also used to reduce income against which the
credit is allowed. First, however, decrease the
loss by the “rate differential portion” of the
excess of net capital gain from nonqualified
sources over net capital gain. Enter on line 9(c)
the amount by which the loss reduces the
corporation's income that qualifies for the credit.
Attach your computation

Line 12.—If line 11 includes income from selling
or exchanging capital assets, include the
reduction for the “rate differential portion” of net
capital gain.

Part Ill

You are not required to complete Part Ill if you
have attached fewer than 10 Schedules P. Part Il
information will not affect your tax liability, but
failure to complete this part, if you are required to
dl $0, will delay the processing of your Form

Line 17.—Enter on line 17(a) the sum of sales of
possession products (as reported on line 2 of Part
of Schedule(s) P) subject to the cost sharing
method. Enter on line 17(b) the sum of sales of
possession products (as reported on line 2 of Part
1 of Schedule(s) P) subject to the profit split
method,

Line 18,—Enter on lines 18(a) through 18(e) the
sum of sales of possession products (as reported
on line 2 of Part | of Schedule(s) P) which have
met the listed business presence test. Total sales
included on lines 18(a) through 18(e) should
equal the total of lines 17(a) and 17(b).
Minimum Tax.—For tax years beginning after
1986, the minimum tax applies only to income
not qualified for the possessions corporation tax
credit, therefore, the credit may not be used
against the minimum tax.