§941. Qualifying foreign trade income

(a) Qualifying foreign trade income

For purposes of this subpart and section 114-

(1) In general

The term "qualifying foreign trade income" means, with respect to any transaction, the amount of gross income which, if excluded, will result in a reduction of the taxable income of the taxpayer from such transaction equal to the greatest of-

(A) 30 percent of the foreign sale and leasing income derived by the taxpayer from such transaction,

(B) 1.2 percent of the foreign trading gross receipts derived by the taxpayer from the transaction, or

(C) 15 percent of the foreign trade income derived by the taxpayer from the transaction.

In no event shall the amount determined under subparagraph (B) exceed 200 percent of the amount determined under subparagraph (C).

(2) Alternative computation

A taxpayer may compute its qualifying foreign trade income under a subparagraph of paragraph (1) other than the subparagraph which results in the greatest amount of such income.

(3) Limitation on use of foreign trading gross receipts method

If any person computes its qualifying foreign trade income from any transaction with respect to any property under paragraph (1)(B), the qualifying foreign trade income of such person (or any related person) with respect to any other transaction involving such property shall be zero.

(4) Rules for marginal costing

The Secretary shall prescribe regulations setting forth rules for the allocation of expenditures in computing foreign trade income under paragraph (1)(C) in those cases where a taxpayer is seeking to establish or maintain a market for qualifying foreign trade property.

(5) Participation in international boycotts, etc.

Under regulations prescribed by the Secretary, the qualifying foreign trade income of a taxpayer for any taxable year shall be reduced (but not below zero) by the sum of-

(A) an amount equal to such income multiplied by the international boycott factor determined under section 999, and

(B) any illegal bribe, kickback, or other payment (within the meaning of section 162(c)) paid by or on behalf of the taxpayer directly or indirectly to an official, employee, or agent in fact of a government.

(b) Foreign trade income

For purposes of this subpart-

(1) In general

The term "foreign trade income" means the taxable income of the taxpayer attributable to foreign trading gross receipts of the taxpayer.

(2) Special rule for cooperatives

In any case in which an organization to which part I of subchapter T applies which is engaged in the marketing of agricultural or horticultural products sells qualifying foreign trade property, in computing the taxable income of such cooperative, there shall not be taken into account any deduction allowable under subsection (b) or (c) of section 1382 (relating to patronage dividends, per-unit retain allocations, and nonpatronage distributions).

(c) Foreign sale and leasing income

For purposes of this section-

(1) In general

The term "foreign sale and leasing income" means, with respect to any transaction-

(A) foreign trade income properly allocable to activities which-

(i) are described in paragraph (2)(A)(i) or (3) of section 942(b), and

(ii) are performed by the taxpayer (or any person acting under a contract with such taxpayer) outside the United States, or

(B) foreign trade income derived by the taxpayer in connection with the lease or rental of qualifying foreign trade property for use by the lessee outside the United States.

(2) Special rules for leased property

(A) Sales income

The term "foreign sale and leasing income" includes any foreign trade income derived by the taxpayer from the sale of property described in paragraph (1)(B).

(B) Limitation in certain cases

Except as provided in regulations, in the case of property which-

(i) was manufactured, produced, grown, or extracted by the taxpayer, or

(ii) was acquired by the taxpayer from a related person for a price which was not determined in accordance with the rules of section 482,

the amount of foreign trade income which may be treated as foreign sale and leasing income under paragraph (1)(B) or subparagraph (A) of this paragraph with respect to any transaction involving such property shall not exceed the amount which would have been determined if the taxpayer had acquired such property for the price determined in accordance with the rules of section 482.

(3) Special rules

(A) Excluded property

Foreign sale and leasing income shall not include any income properly allocable to excluded property described in subparagraph (B) of section 943(a)(3) (relating to intangibles).

(B) Only direct expenses taken into account

For purposes of this subsection, any expense other than a directly allocable expense shall not be taken into account in computing foreign trade income.

(Added Pub. L. 106–519, §3(b), Nov. 15, 2000, 114 Stat. 2424 .)

Prior Provisions

A prior section 941, acts Aug. 16, 1954, ch. 736, 68A Stat. 293 ; Oct. 4, 1976, Pub. L. 94–455, title X, §1053(a), title XIX, §1906(b)(1)(A), 90 Stat. 1648 , 1834, set forth provisions authorizing special deduction for China Trade Act corporations, prior to repeal by Pub. L. 94–455, title X, §1053(c), (e), Oct. 4, 1976, 90 Stat. 1649 , effective with respect to taxable years beginning after Dec. 31, 1977.

Effective Date

Pub. L. 106–519, §5, Nov. 15, 2000, 114 Stat. 2433 , provided that:

"(a) In General.-The amendments made by this Act [enacting this section and sections 114, 942, and 943 of this title, amending sections 56, 275, 864, 903, and 999 of this title, and repealing sections 921 to 927 of this title] shall apply to transactions after September 30, 2000.

"(b) No New FSCs; Termination of Inactive FSCs.-

"(1) No new fscs.-No corporation may elect after September 30, 2000, to be a FSC (as defined in section 922 of the Internal Revenue Code of 1986, as in effect before the amendments made by this Act).

"(2) Termination of inactive fscs.-If a FSC has no foreign trade income (as defined in section 923(b) of such Code, as so in effect) for any period of 5 consecutive taxable years beginning after December 31, 2001, such FSC shall cease to be treated as a FSC for purposes of such Code for any taxable year beginning after such period.

"(c) Transition Period for Existing Foreign Sales Corporations.-

"(1) In general.-In the case of a FSC (as so defined) in existence on September 30, 2000, and at all times thereafter, the amendments made by this Act shall not apply to any transaction in the ordinary course of trade or business involving a FSC which occurs-

"(A) before January 1, 2002; or

"(B) after December 31, 2001, pursuant to a binding contract-

"(i) which is between the FSC (or any related person) and any person which is not a related person; and

"(ii) which is in effect on September 30, 2000, and at all times thereafter.

For purposes of this paragraph, a binding contract shall include a purchase option, renewal option, or replacement option which is included in such contract and which is enforceable against the seller or lessor.

"(2) Election to have amendments apply earlier.-A taxpayer may elect to have the amendments made by this Act apply to any transaction by a FSC or any related person to which such amendments would apply but for the application of paragraph (1). Such election shall be effective for the taxable year for which made and all subsequent taxable years, and, once made, may be revoked only with the consent of the Secretary of the Treasury.

"(3) Exception for old earnings and profits of certain corporations.-

"(A) In general.-In the case of a foreign corporation to which this paragraph applies-

"(i) earnings and profits of such corporation accumulated in taxable years ending before October 1, 2000, shall not be included in the gross income of the persons holding stock in such corporation by reason of section 943(e)(4)(B)(i); and

"(ii) rules similar to the rules of clauses (ii), (iii), and (iv) of section 953(d)(4)(B) shall apply with respect to such earnings and profits.

  The preceding sentence shall not apply to earnings and profits acquired in a transaction after September 30, 2000, to which section 381 applies unless the distributor or transferor corporation was immediately before the transaction a foreign corporation to which this paragraph applies.

"(B) Existing fscs.-This paragraph shall apply to any controlled foreign corporation (as defined in section 957) if-

"(i) such corporation is a FSC (as so defined) in existence on September 30, 2000;

"(ii) such corporation is eligible to make the election under section 943(e) by reason of being described in paragraph (2)(B) of such section; and

"(iii) such corporation makes such election not later than for its first taxable year beginning after December 31, 2001.

"(C) Other corporations.-This paragraph shall apply to any controlled foreign corporation (as defined in section 957), and such corporation shall (notwithstanding any provision of section 943(e)) be treated as an applicable foreign corporation for purposes of section 943(e), if-

"(i) such corporation is in existence on September 30, 2000;

"(ii) as of such date, such corporation is wholly owned (directly or indirectly) by a domestic corporation (determined without regard to any election under section 943(e));

"(iii) for each of the 3 taxable years preceding the first taxable year to which the election under section 943(e) by such controlled foreign corporation applies-

     "(I) all of the gross income of such corporation is subpart F income (as defined in section 952), including by reason of section 954(b)(3)(B); and

     "(II) in the ordinary course of such corporation's trade or business, such corporation regularly sold (or paid commissions) to a FSC which on September 30, 2000, was a related person to such corporation;

"(iv) such corporation has never made an election under section 922(a)(2) (as in effect before the date of the enactment of this paragraph [Nov. 15, 2000]) to be treated as a FSC; and

"(v) such corporation makes the election under section 943(e) not later than for its first taxable year beginning after December 31, 2001.

  The preceding sentence shall cease to apply as of the date that the domestic corporation referred to in clause (ii) ceases to wholly own (directly or indirectly) such controlled foreign corporation.

"(4) Related person.-For purposes of this subsection, the term 'related person' has the meaning given to such term by section 943(b)(3).

"(5) Section references.-Except as otherwise expressly provided, any reference in this subsection to a section or other provision shall be considered to be a reference to a section or other provision of the Internal Revenue Code of 1986, as amended by this Act.

"(d) Special Rules Relating to Leasing Transactions.-

"(1) Sales income.-If foreign trade income in connection with the lease or rental of property described in section 927(a)(1)(B) of such Code (as in effect before the amendments made by this Act) is treated as exempt foreign trade income for purposes of section 921(a) of such Code (as so in effect), such property shall be treated as property described in section 941(c)(1)(B) of such Code (as added by this Act) for purposes of applying section 941(c)(2) of such Code (as so added) to any subsequent transaction involving such property to which the amendments made by this Act apply.

"(2) Limitation on use of gross receipts method.-If any person computed its foreign trade income from any transaction with respect to any property on the basis of a transfer price determined under the method described in section 925(a)(1) of such Code (as in effect before the amendments made by this Act), then the qualifying foreign trade income (as defined in section 941(a) of such Code, as in effect after such amendment) of such person (or any related person) with respect to any other transaction involving such property (and to which the amendments made by this Act apply) shall be zero."

Section Referred to in Other Sections

This section is referred to in sections 275, 943, 999 of this title.