§942. Foreign trading gross receipts

(a) Foreign trading gross receipts

(1) In general

Except as otherwise provided in this section, for purposes of this subpart, the term "foreign trading gross receipts" means the gross receipts of the taxpayer which are-

(A) from the sale, exchange, or other disposition of qualifying foreign trade property,

(B) from the lease or rental of qualifying foreign trade property for use by the lessee outside the United States,

(C) for services which are related and subsidiary to-

(i) any sale, exchange, or other disposition of qualifying foreign trade property by such taxpayer, or

(ii) any lease or rental of qualifying foreign trade property described in subparagraph (B) by such taxpayer,

(D) for engineering or architectural services for construction projects located (or proposed for location) outside the United States, or

(E) for the performance of managerial services for a person other than a related person in furtherance of the production of foreign trading gross receipts described in subparagraph (A), (B), or (C).

Subparagraph (E) shall not apply to a taxpayer for any taxable year unless at least 50 percent of its foreign trading gross receipts (determined without regard to this sentence) for such taxable year is derived from activities described in subparagraph (A), (B), or (C).

(2) Certain receipts excluded on basis of use; subsidized receipts excluded

The term "foreign trading gross receipts" shall not include receipts of a taxpayer from a transaction if-

(A) the qualifying foreign trade property or services-

(i) are for ultimate use in the United States, or

(ii) are for use by the United States or any instrumentality thereof and such use of qualifying foreign trade property or services is required by law or regulation, or

(B) such transaction is accomplished by a subsidy granted by the government (or any instrumentality thereof) of the country or possession in which the property is manufactured, produced, grown, or extracted.

(3) Election to exclude certain receipts

The term "foreign trading gross receipts" shall not include gross receipts of a taxpayer from a transaction if the taxpayer elects not to have such receipts taken into account for purposes of this subpart.

(b) Foreign economic process requirements

(1) In general

Except as provided in subsection (c), a taxpayer shall be treated as having foreign trading gross receipts from any transaction only if economic processes with respect to such transaction take place outside the United States as required by paragraph (2).

(2) Requirement

(A) In general

The requirements of this paragraph are met with respect to the gross receipts of a taxpayer derived from any transaction if-

(i) such taxpayer (or any person acting under a contract with such taxpayer) has participated outside the United States in the solicitation (other than advertising), the negotiation, or the making of the contract relating to such transaction, and

(ii) the foreign direct costs incurred by the taxpayer attributable to the transaction equal or exceed 50 percent of the total direct costs attributable to the transaction.

(B) Alternative 85-percent test

A taxpayer shall be treated as satisfying the requirements of subparagraph (A)(ii) with respect to any transaction if, with respect to each of at least two subparagraphs of paragraph (3), the foreign direct costs incurred by such taxpayer attributable to activities described in such subparagraph equal or exceed 85 percent of the total direct costs attributable to activities described in such subparagraph.

(C) Definitions

For purposes of this paragraph-

(i) Total direct costs

The term "total direct costs" means, with respect to any transaction, the total direct costs incurred by the taxpayer attributable to activities described in paragraph (3) performed at any location by the taxpayer or any person acting under a contract with such taxpayer.

(ii) Foreign direct costs

The term "foreign direct costs" means, with respect to any transaction, the portion of the total direct costs which are attributable to activities performed outside the United States.

(3) Activities relating to qualifying foreign trade property

The activities described in this paragraph are any of the following with respect to qualifying foreign trade property-

(A) advertising and sales promotion,

(B) the processing of customer orders and the arranging for delivery,

(C) transportation outside the United States in connection with delivery to the customer,

(D) the determination and transmittal of a final invoice or statement of account or the receipt of payment, and

(E) the assumption of credit risk.

(4) Economic processes performed by related persons

A taxpayer shall be treated as meeting the requirements of this subsection with respect to any sales transaction involving any property if any related person has met such requirements in such transaction or any other sales transaction involving such property.

(c) Exception from foreign economic process requirement

(1) In general

The requirements of subsection (b) shall be treated as met for any taxable year if the foreign trading gross receipts of the taxpayer for such year do not exceed $5,000,000.

(2) Receipts of related persons aggregated

All related persons shall be treated as one person for purposes of paragraph (1), and the limitation under paragraph (1) shall be allocated among such persons in a manner provided in regulations prescribed by the Secretary.

(3) Special rule for pass-thru entities

In the case of a partnership, S corporation, or other pass-thru entity, the limitation under paragraph (1) shall apply with respect to the partnership, S corporation, or entity and with respect to each partner, shareholder, or other owner.

(Added Pub. L. 106–519, §3(b), Nov. 15, 2000, 114 Stat. 2426 .)

Prior Provisions

A prior section 942, act Aug. 16, 1954, ch. 736, 68A Stat. 294 , disallowed foreign tax credit authorized by section 901 to any corporation organized under the China Trade Act, 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.

Section Referred to in Other Sections

This section is referred to in sections 114, 941, 943 of this title.