Possessions Corporation Tax Credit

Allowed Under Section 936

Form 5735

OMB No. 1545-0217 (Rev. April 1992)

Expires 4-30-95 Department of the Treasury

Internal Revenue Service © Attach to your tax return

For calendar year 19 , or other tax year beginning , 19 , and ending , 19 .

Name Employer identification number

Gross Income in Applicable Period (See instructions.)

Periods in which trade or business was actively

conducted in a U.S. possession (Dates are

inclusive)

Tax year (Use a separate line for each tax year

ending with or within your applicable period. Start

with the earliest such tax year.)

(e)

To—

(d)

From—

(c)

Name of U.S. possession in which trade or

(b) business was actively conducted

Ending

(a)

Beginning

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

Gross income from the active conduct of a trade or business in a U.S. possession All other gross income

(l)

From sources in the

U.S.

(k)

From all other sources

outside the U.S.

(j)

From sources in U.S.

possessions

(i)

Gross qualified

possession source

investment income

(h)

From sources in

the U.S.

(g)

From all other sources

outside the U.S.

(f)

From sources in U.S.

possessions

Totals

1 Total gross income in applicable period (add totals of columns (f) through (l)) 1

2 Gross income in applicable period from sources in U.S. possessions (add total of columns (f), (i), and (j)) 2

3 Divide line 2 by line 1 (if less than 80%, do not complete Parts II and III) 3

4 Gross income from the active conduct of a trade or business in a U.S. possession (total of columns (f), (g), and (h)) 4

5 Divide line 4 by line 1 (if less than 75%, do not complete Parts II and III) 5

Possessions Corporation Tax Credit (See instructions.)

6 Qualified gross income in current year:

From sources outside the U.S. from the active conduct of a trade or

business in a U.S. possession

a

6a

b From sources outside the U.S. from the sale or exchange of substantially

all assets used in a possessions trade or business 6b

c Gross qualified possession source investment income 6c

d Amounts received in the U.S. 6d

e Intangible property income subject to section 936(h)(2) 6e

Other intangible property income 6f f

g Add lines 6a, 6b, and 6c 6g

h Add lines 6d, 6e, and 6f 6h

6i i Subtract line 6h from line 6g

7 Applicable deductions (attach schedule):

a Cost sharing amount 7a

b Definitely allocable deductions 7b

c Ratable part of deductions not definitely allocable 7c

d Total (add lines 7a, 7b, and 7c) 7d

8 Qualified taxable income before adjustments (subtract line 7d from line 6i) 8

9 Adjustments (attach schedule):

a Current year losses from nonqualified sources 9a

b Recapture of prior year overall foreign losses 9b

c Income against which foreign tax credit is claimed 9c

d Total (add lines 9a, 9b, and 9c) 9d

10 Qualified taxable income (subtract line 9d from line 8) 10

11 Total taxable income from all sources (enter taxable income from the corporation’s tax return) 11

12 12

13 Total U.S. income tax against which section 936 credit is allowed (see General Instruction C) 13

14 Section 936 credit (multiply line 12 by line 13). Enter here and on the corporation’s tax return 14

For Paperwork Reduction Act Notice, see instructions on back. Cat. No. 12090G Form 5735 (Rev.4-92)

Part I

Part II

Divide line 10 by line 11
Form 5735 (Rev. 4-92) Page 2

Summary From Schedule P (Form 5735) (See instructions.)

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

a Cost sharing method 15a

b Profit split method 15b

16 Enter the total sales of possession products which qualify under each business presence test:

a Direct labor test 16a

b Value-added test 16b

c Alternative test 16c

d Start-up test 16d

e None of the above 16e

Part II

General Instructions

Line 6a.—Include amount(s) reported on line 6 of

Part II of Schedule(s) P.

(Section references are to the Internal Revenue

Code unless otherwise noted.) ● recapture of low-income housing credit

(section 42(j)(4)(D))

Line 6d.—Do not include any amount from

sources outside the U.S. and received from a

person who is not a related person in the active

conduct of a trade or business in a U.S.

possession. Instead, include these amounts on

line 6a, 6b, or 6c, whichever is applicable.

Paperwork Reduction Act Notice.—We ask for

the information on this form to carry out the

Internal Revenue laws of the United States. You

are required to give us the information. We need

it to ensure that you are complying with these

laws and to allow us to figure and collect the

right amount of tax.

D. Where To File.—Attach Form 5735 to the

corporation’s income tax return and file it with

the Internal Revenue Service Center,

Philadelphia, PA 19255.

E. Alternative Minimum Tax.—Income eligible

for the possessions corporation tax credit is not

taxed under the alternative minimum tax rules.

See Form 4626.

Line 6f.—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

U.S. person. See Regulations section 1.936-

6(a)(5).

The time needed to complete and file this form

will vary depending on individual circumstances.

The estimated average time is: F. Form 5712-A—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.

Recordkeeping 11 hr., 43 min.

Learning about the

law or the form 2 hr., 5 min.

Preparing and sending

the form to the IRS 2 hr., 22 min.

Line 7a.—If the cost sharing method applies,

enter the sum of all cost sharing amounts

entered on line 7, Part I of Schedule(s) P.

If you have comments concerning the

accuracy of these time estimates or suggestions

for making this form more simple, we would be

happy to hear from you. You can write to both

the IRS and the Office of Management and

Budget at the addresses listed in the instructions

for the tax return with which this form is filed.

Line 7b.—Include all amounts entered on line 7,

Part II of Schedule(s) P. Also include the

corporation’s other definitely allocable

deductions.

Line 7c.—Enter 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 7b.

Multiply this result by the amount obtained when

you divide the amount entered on line 6i by the

gross income on the corporation’s income tax

return.

Specific Instructions

A. Purpose of Form.—A domestic corporation

(other than an S corporation) that has elected to

be treated as a possessions corporation must

complete and attach Form 5735 to its income

tax return for each year the election is in effect.

Form 5735 is used to figure the possessions

corporation tax credit under section 936. The

credit is allowed against income tax imposed by

Chapter 1. Puerto Rico and the Virgin Islands are

U.S. possessions for purposes of this credit.

See 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 in a U.S. possession. Amounts

received in the U.S. may be considered sourced

outside the U.S. if they 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)).

Line 9a.—If the corporation sustained a loss for

the current year on any type of income for which

a separate foreign tax credit limit applies,

allocate the loss to the possessions income that

qualifies for the credit in proportion to the ratio

of that income to total taxable income, excluding

the loss.

B. Qualifying for the Credit.—To qualify for the

possessions corporation tax credit a corporation

must have:

The corporation cannot take a deduction or

foreign tax credit for taxes it 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.

Line 9b.—If the corporation sustained an overall

foreign loss in any year, the loss is recaptured in

later tax years by treating part of the

corporation’s taxable income from sources

outside the U.S. as income from sources in the

U.S. (section 904(f)).

1. filed a valid Form 5712, Election To Be

Treated as a Possessions Corporation Under

Section 936;

2. derived 80% or more of its gross income

from sources in a U.S. possession during the

applicable period (see definition in Part I below)

immediately before the tax year ended; and

Part I

Part III

The “applicable period” is generally the shorter

of 36 months or the period when the corporation

actively conducted a trade or business in a U.S.

possession.

The corporation is not required to complete Part

III if it has attached less than 10 Schedules P.

Part III information will not affect the

corporation’s tax liability. However, failure to

complete this part, if required, will delay the

processing of Form 5735.

3. derived 75% 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.

Column (f).—Include amount(s) reported on line

6 of Part II of Schedule(s) P.

C. Restrictions.—A corporation is ineligible to

take the possessions corporation tax credit for

any tax year it is a IC-DISC or former IC-DISC,

or for any tax year in which it owns stock in a

IC-DISC or FSC, or former IC-DISC or former

FSC (section 936(f)).

Column (i).—Certain loans of qualified funds by

a qualified financial institution are considered

investments for use in Puerto Rico. These loans

must either be investments in active business

assets or for investment in development projects

in a qualified Caribbean Basin country. The

investment must be authorized prior to

disbursement of the funds by the Commissioner

of Financial Institutions of Puerto Rico. Also, the

agreements, certifications, and due diligence

requirements of Regulations section

1.936-10(c)(11), (12), and (13) must be met. See

Regulations section 1.936-10 for details and the

effective date.

Line 15.—Enter on line 15a the sum of sales of

possession products (as reported on line 2 of

Part I of Schedule(s) P) subject to the cost

sharing method. Enter on line 15b the sum of

sales of possession products (as reported on line

2 of Part I of Schedule(s) P) subject to the profit

split method.

The credit is not allowed against the following

taxes:

Line 16.—Enter on lines 16a through 16e the

sum of sales of possession products (as

reported on line 2 of Part I of Schedule(s) P)

which have met the listed business presence

test. Total sales included on lines 16a through

16e should equal the total of lines 15a and 15b.

● environmental tax (section 59A)

● tax on accumulated earnings (section 531)

● personal holding company tax (section 541)

● additional tax for recovery of foreign

expropriation losses (section 1351)

Part III

● tax increase on the early disposition of

investment credit property (section 50)