¹A foreign corporation is a CFC if more than 50% of its stocks vote or value is owned directly, indirectly or constructively by U.S. shareholders. A U.S. shareholder is a person who owns directly, indirectly or constructively at least 10% of the foreign corporations voting stock; see Secs. 951(b), 957(a) and 958.

²A CFCs investment in U.S. property is treated as a repatriation of earnings to its U.S. shareholders. If an increase in earnings invested in U.S. property is attributable to previously taxed Subpart F income, such amounts are not taxed again; see Secs. 956(a)(1)(B) and 959(a)(2). Under Sec. 956(c), U.S. property includes tangible property located in the U.S., any stock or obligation of a related U.S. person (i.e., a 10% U.S. shareholder or a 25% related U.S. corporation), and any right to use certain intangibles (e.g., patents and copyrights) acquired or developed by the CFC for use in the U.S. However, U.S. property does not include U.S. obligations, U.S. bank deposits, stock in unrelated U.S. corporations and tangible property purchased and located in the U.S. for export.

³Subpart F income is income immediately taxable to a U.S. taxpayer, even though it is not repatriated. It is generally passive income and income earned by a CFC outside its country of incorporation from certain transactions involving related parties. E&P can operate to limit Subpart F income taxable in a tax year; see Secs. 951(a) and 952(c)(1)(A). For a discussion of Subpart F income, see Lau, Auster and McCotter, Entity Decisions for Overseas Operations After TRA 97, 25 J. Corp. Taxn 149 (1998).

⁴A U.S taxpayer is taxed on its worldwide income. To prevent double taxation of income earned overseas (foreign-source income), a U.S. taxpayer can credit foreign income taxes against its U.S. tax liability. E&P plays a major role in determining the foreign income tax attributable to a dividend paid (or deemed paid) by a foreign corporation under Secs. 901, 902 and 960.

⁵For tax years beginning after Aug. 24, 1994, however, E&P of a foreign corporation that operates in a hyperinflationary currency environment is generally kept in U.S. dollars. A hyperinflationary currency is the currency of a country in which its cumulative compounded inflation rate is at least 100% over a 36-month period preceding the current calendar year; see Regs. Secs. 1.985-1(b)(2)(ii) and 1.964-1(a), and Temp. Regs. Sec. 1.964-1T(g).

⁶See Regs. Sec. 1.964-1(c)(6) and Temp. Regs. Sec. 1.964-1T(g)(2).

⁷Under Sec. 263A(f)(4)(B), the construction period begins on the date that construction begins, and ends on the date the property is ready to be placed in service or held for sale.

⁸See Notices 89-67, 1989-1 CB 723 and 88-104, 1988-2 CB 443. For interest capitalization, see Notice 88-99, 1988-2 CB 422.

⁹Passive income generally includes dividends, interest, rents, royalties, annuities, net gains from the sale of assets that produce passive income (or no income), and net gains from certain commodity and currency transactions; see Sec. 904(d)(2)(A)(i) and Regs. Secs. 1.904-4(b)(1) and 1.954-2(a)(1). Passive income also includes income reported under the foreign personal holding company (FPHC) and passive foreign investment company (PFIC) rules; see Sec. 904(d)(2)(A)(ii). It does not include high-taxed income, export financing interest and income included in another basket (e.g., high-withholding-tax interest). High-taxed income is passive income subject to an aggregate foreign income tax (including deemed paid taxes) greater than the highest applicable U.S. tax rate. The high-taxed-income test is applied to net passive income (i.e., after the allocation of expense of the U.S. taxpayer to such income); such high-taxed income is excluded from the passive income basket and included in the general limitation basket. Items of passive income are segregated into groups for purposes of determining if they are high-taxed income; see Sec. 904(d)(2)(A)(iii) and Regs. Sec. 1.904-4(c).

¹⁰High-withholding-tax interest is any interest income subject to foreign withholding tax of 5% or more. Under Regs. Sec. 1.904-4(d), all such interest is included in the high-withholding-tax-interest basket, except for export financing interest.

¹¹A noncontrolled Sec. 902 corporation is any foreign corporation in which a U.S. taxpayer owns at least 10%, but no more than 50%, of the voting stock. Prior to 2003, a separate limitation basket was required for dividends from each noncontrolled Sec. 902 corporation. For tax years beginning after 2002, dividends from noncontrolled Sec. 902 corporations that are not PFICs are treated as a single limitation category for earnings accumulated prior to 2003. Distributions from earnings accumulated in tax years beginning after 2002 are subject to lookthrough rules; see Sec. 904(d)(1)(E), (d)(2)(E) and (d)(4).

¹²This basket includes income items not included in another basket. Most active trade or business income should fall within this basket. Export financing interest and high-taxed passive income are also included. This basket can have both high- and low-taxed income; see Regs. Sec. 1.904-4(h).

¹³See Notice 2003-5, IRB 2003-3, 294, for guidance on the new lookthrough rules and transition rules.

¹⁴If the potential Subpart F income is de minimis (i.e., less than 5% of the CFCs gross income or $1 million, if less), all such income (except financial services income) is general limitation income; see Regs. Secs. 1.904-5(d)(1) and 1.954-1(b)(1).