§956A. Earnings invested in excess passive assets

(a) General rule

In the case of any controlled foreign corporation, the amount determined under this section with respect to any United States shareholder for any taxable year is the lesser of-

(1) the excess (if any) of-

(A) such shareholder's pro rata share of the amount of the controlled foreign corporation's excess passive assets for such taxable year, over

(B) the amount of earnings and profits described in section 959(c)(1)(B) with respect to such shareholder, or

(2) such shareholder's pro rata share of the applicable earnings of such controlled foreign corporation determined after the application of section 951(a)(1)(B).

(b) Applicable earnings

For purposes of this section, the term "applicable earnings" means, with respect to any controlled foreign corporation, the sum of-

(1) the amount referred to in section 316(a)(1) to the extent such amount was accumulated in taxable years beginning after September 30, 1993, and

(2) the amount referred to in section 316(a)(2),

but reduced by distributions made during the taxable year and reduced by the earnings and profits described in section 959(c)(1) to the extent that the earnings and profits so described were accumulated in taxable years beginning after September 30, 1993.

(c) Excess passive assets

For purposes of this section-

(1) In general

The excess passive assets of any controlled foreign corporation for any taxable year is the excess (if any) of-

(A) the average of the amounts of passive assets held by such corporation as of the close of each quarter of such taxable year, over

(B) 25 percent of the average of the amounts of total assets held by such corporation as of the close of each quarter of such taxable year.

For purposes of the preceding sentence, the amount taken into account with respect to any asset shall be its adjusted basis as determined for purposes of computing earnings and profits.

(2) Passive asset

(A) In general

Except as otherwise provided in this section, the term "passive asset" means any asset held by the controlled foreign corporation which produces passive income (as defined in section 1296(b)) or is held for the production of such income.

(B) Coordination with section 956

The term "passive asset" shall not include any United States property (as defined in section 956).

(3) Certain rules to apply

For purposes of this subsection, the rules of the following provisions shall apply:

(A) Section 1296(c) (relating to look-thru rules).

(B) Section 1297(d) (relating to leasing rules).

(C) Section 1297(e) (relating to intangible property).

(d) Treatment of certain groups of controlled foreign corporations

(1) In general

For purposes of applying subsection (c)-

(A) all controlled foreign corporations which are members of the same CFC group shall be treated as 1 controlled foreign corporation, and

(B) the amount of the excess passive assets determined with respect to such 1 corporation shall be allocated among the controlled foreign corporations which are members of such group in proportion to their respective amounts of applicable earnings.

(2) CFC group

For purposes of paragraph (1), the term "CFC group" means 1 or more chains of controlled foreign corporations connected through stock ownership with a top tier corporation which is a controlled foreign corporation, but only if-

(A) the top tier corporation owns directly more than 50 percent (by vote or value) of the stock of at least 1 of the other controlled foreign corporations, and

(B) more than 50 percent (by vote or value) of the stock of each of the controlled foreign corporations (other than the top tier corporation) is owned (directly or indirectly) by one or more other members of the group.

(e) Special rule where corporation ceases to be controlled foreign corporation during taxable year

If any foreign corporation ceases to be a controlled foreign corporation during any taxable year-

(1) the determination of any United States shareholder's pro rata share shall be made on the basis of stock owned (within the meaning of section 958(a)) by such shareholder on the last day during the taxable year on which the foreign corporation is a controlled foreign corporation,

(2) the amount of such corporation's excess passive assets for such taxable year shall be determined by only taking into account quarters ending on or before such last day, and

(3) in determining applicable earnings, the amount taken into account by reason of being described in paragraph (2) of section 316(a) shall be the portion of the amount so described which is allocable (on a pro rata basis) to the part of such year during which the corporation is a controlled foreign corporation.

(f) Regulations

The Secretary shall prescribe such regulations as may be necessary to carry out the purposes of this section, including regulations to prevent the avoidance of the provisions of this section through reorganizations or otherwise.

(Added Pub. L. 103–66, title XIII, §13231(b), Aug. 10, 1993, 107 Stat. 496 .)

Effective Date

Section applicable to taxable years of foreign corporations beginning after Sept. 30, 1993, and to taxable years of United States shareholders in which or with which such taxable years of foreign corporations end, see section 13231(e) of Pub. L. 103–66, set out as an Effective Date of 1993 Amendment note under section 951 of this title.

Section Referred to in Other Sections

This section is referred to in sections 951, 956, 1297 of this title.