FOREIGN CORPORATIONS.

SEC. 104. FOREIGN CORPORATIONS. (a) Tax on Income Not Connected With United States Business.— Section 881 (relating to tax on foreign corporations not engaged in business in the United States) is amended to read as follows: “SEC. 881. TAX ON INCOME OF FOREIGN CORPORATIONS NOT CONNECTED WITH UNITED STATES BUSINESS. “(a) Imposition of Tax.— There is hereby imposed for each taxable year a tax of 30 percent of the amount received from sources within the United States by a foreign corporation as— “(1) interest, dividends, rents, salaries, wages, premiums, annuities, compensations, remunerations, emoluments, and other fixed or determinable annual or periodical gains, profits, and income, “(2) gains described in section 631 (b) or (c), “(3) in the case of bonds or other evidences of indebtedness issued after September 28, 1965, amounts which under section 1232 are considered as gains from the sale or exchange of property which is not a capital asset, and “(4) gains from the sale or exchange after October 4, 1966, of patents, copyrights, secret processes and formulas, good will, trademarks, trade brands, franchises, and other like property, or of any interest in any such property, to the extent such gains are from payments which are contingent on the productivity, use, or disposition of the property or interest sold or exchanged, or from payments which are treated as being so contingent under section 871(e), but only to the extent the amount so received is not effectively connected with the conduct of a trade or business within the United States. “(b) Doubling of Tax.— “For doubling of tax on corporations of certain foreign countries, see section 891.” (b) Tax on Income Connected With United States Business.— (1) Section 882 (relating to tax on resident foreign corporations) is amended to read as follows: “SEC. 882. TAX ON INCOME OF FOREIGN CORPORATIONS CONNECTED WITH UNITED STATES BUSINESS. “(a) Normal Tax and Surtax.— “(1) Imposition of tax.— A foreign corporation engaged in trade or business within the United States during the taxable year shall be taxable as provided in section 11 or 1201(a) on its taxable income which is effectively connected with the conduct of a trade or business within the United States. “(2) Determination of taxable income.— In determining taxable income for purposes of paragraph (1), gross income includes only gross income which is effectively connected with the conduct of a trade or business within the United States. “(b) Gross Income.— In the case of a foreign corporation, gross income includes only— 80 Stat. 1556 “(1) gross income which is derived from sources within the United States and which is not effectively connected with the conduct of a trade or business within the United States, and “(2) gross income which is effectively connected with the conduct of a trade or business within the United States. “(c) Allowance of Deductions and Credits.— “(1) Allocation of deductions.— “(A) General rule.—In the case of a foreign corporation, the deductions shall be allowed only for purposes of subsection (a) and (except as provided by subparagraph (B)) only if and to the extent that they are connected with income which is effectively connected with the conduct of a trade or business within the United States; and the proper apportionment and allocation of the deductions for this purpose shall be determined as provided in regulations prescribed by the Secretary or his delegate. “(B) Charitable contributions.—The deduction for charitable contributions and gifts provided by section 170 shall be allowed whether or not connected with income which is effectively connected with the conduct of a trade or business within the United States. “(2) Deductions and credits allowed only if return filed.— A foreign corporation shall receive the benefit of the deductions and credits allowed to it in this subtitle only by filing or causing to be filed with the Secretary or his delegate a true and accurate return, in the manner prescribed in subtitle F, including therein all the information which the Secretary or his delegate may deem necessary for the calculation of such deductions and credits. The preceding sentence shall not apply for purposes of the tax imposed by section 541 (relating to personal holding company tax), and shall not be construed to deny the credit provided by section 32 for tax withheld at source or the credit provided by section 39 for certain uses of gasoline and lubricating oil. “(3) Foreign tax credit.—-Except as provided by section 906, foreign corporations shall not be allowed the credit against the tax for taxes of foreign countries and possessions of the United States allowed by section 901. “(4) Cross reference.— “For rule that certain foreign taxes are not to be taken into account in determining deduction or credit, see section 906(b)(1). “(d) Election To Treat Real Property Income as Income Connected With United States Business.— “(1) In general.— A foreign corporation which during the taxable year derives any income— “(A) from real property located in the United States, or from any interest in such real property, including (i) gains from the sale or exchange of real property or an interest therein, (ii) rents or royalties from mines, wells, or other natural deposits, and (iii) gains described in section 631 (b) or (c),and “(B) which, but for this subsection, would not be treated as income effectively connected with the conduct of a trade or business within the United States, may elect for such taxable year to treat all such income as income which is effectively connected with the conduct of a trade or business within the United States. In such case, such income shall be taxable as provided in subsection (a)(1) whether or not such corporation is engaged in trade or business within the 80 Stat. 1557United States during the taxable year. An election under this paragraph for any taxable year shall remain in effect for all subsequent taxable years, except that it may be revoked with the consent of the Secretary or his delegate with respect to any taxable year. “(2) Election after revocation, etc.—Paragraphs (2) and (3) or section 871 (d) shall apply in respect of elections under this subsection in the same manner and to the same extent as they apply in respect of elections under section 871(d). “(e) Interest on United States Obligations Received by Banks Organized in Possessions.— In the case of a corporation created or organized in, or under the law of, a possession of the United States which is carrying on the banking business in a possession of the United States, interest on obligations of the United States shall— “(1) for purposes of this subpart, be treated as income which is effectively connected with the conduct of a trade or business within the United States, and “(2) shall be taxable as provided in subsection (a)(1) whether or not such corporation is engaged in trade or business within the United States during the taxable year. “(f) Returns of Tax by Agent.—If any foreign corporation has no office or place of business in the United States but has an agent in the United States, the return required under section 6012 shall be made by the agent.” (2) (A) Subsection (e) of section 11 (relating to exceptions from tax on corporations) is amended by inserting “or” at the end of paragraph (2), by striking out “, or” at the end of paragraph (3) and inserting a period in lieu thereof, and by striking out paragraph (4). (B) Section 11 (relating to tax on corporations) is amended by adding at the end thereof the following new subsection: “(f) Foreign Corporations.— In the case of a foreign corporation, the tax imposed by subsection (a) shall apply only as provided by section 882.” (3) The table of sections for subpart B of part II of subchapter N of chapter 1 is amended by striking out the items relating to sections 881 and 882 and inserting in lieu thereof the following: “Sec. 881. Tax on income of foreign corporations not connected with United States business. “Sec. 882. Tax on income of foreign corporations connected with United States business.” (c) Withholding of Tax on Foreign Corporations.— Section 1442 (relating to withholding of tax on foreign corporations) is amended to read as follows: “SEC. 1442. WITHHOLDING OF TAX ON FOREIGN CORPORATIONS. “(a) General Rule.— In the case of foreign corporations subject to taxation under this subtitle, there shall be deducted and withheld at the source in the same manner and on the same items of income as is provided in section 1441 or section 1451 a tax equal to 30 percent thereof; except that, in the case of interest described in section 1451 (relating to tax-free covenant bonds), the deduction and withholding shall be at the rate specified therein. For purposes of the preceding sentence, the references in section 1441(b) to sections 871(a)(1)(C) and (D) shall be treated as referring to sections 881(a)(3) and (4), the reference in section 1441(c)(1) to section 871(b)(2) shall be treated as referring to section 842 or section 882(a)(2), as the case 80 Stat. 1558may be, and the reference in section 1441(c)(5) to section 871(a)(1)(D) shall be treated as referring to section 881(a)(4). “(b) Exemption.— Subject to such terms and conditions as may be provided by regulations prescribed by the Secretary or his delegate, subsection (a) shall not apply in the case of a foreign corporation engaged in trade or business within the United States if the Secretary or his delegate determines that the requirements of subsection (a) impose an undue administrative burden and that the collection of the tax imposed by section 881 on such corporation will not be jeopardized by the exemption.” (d) Dividends Received From Certain Foreign Corporations.— Subsection (a) of section 245 (relating to the allowance of a deduction in respect of dividends received from a foreign corporation) is amended— (1) by striking out “and has derived 50 percent or more of its gross income from sources within the United States,” in that portion of subsection (a) which precedes paragraph (1) and by inserting in lieu thereof “and if 50 percent or more of the gross income of such corporation from all sources for such period is effectively connected with the conduct of a trade or business within the United States,”; (2) by striking out “from sources within the United States” in paragraph (1) and inserting in lieu thereof “which is effectively connected with the conduct of a trade or business within the United States”; (3) by striking out “from sources within the United States” in paragraph (2) and inserting in lieu thereof “, which is effectively connected with the conduct of a trade or business within the United States,”; and (4) by adding after paragraph (2) the following new sentence: “For purposes of this subsection, the gross income of the foreign corporation for any period before the first taxable year beginning after December 31, 1966, which is effectively connected with the conduct of a trade or business within the United States is an amount equal to the gross income for such period from sources within the United States.” (e) Dividends Received From Certain Wholly-Owned Foreign Subsidiaries.— (1) Section 245 (relating to dividends received from certain foreign corporations) is amended by redesignating subsection (b) as(c), and by inserting after subsection (a) the following new subsection: “(b) Certain Dividends Received From Wholly Owned Foreign Subsidiaries.— “(1) In general.—In the case of dividends described in paragraph (2) received from a foreign corporation by a domestic corporation which, for its taxable year in which such dividends are received, owns (directly or indirectly) all of the outstanding stock of such foreign corporation, there shall be allowed as a deduction (in lieu of the deduction provided by subsection (a)) an amount equal to 100 percent of such dividends. “(2) Eligible dividends.— Paragraph (1) shall apply only to dividends which are paid out of the earnings and profits of a foreign corporation for a taxable year during which— “(A) all of its outstanding stock is owned (directly or indirectly) by the domestic corporation to which such dividends are paid; and “(B) all of its gross income from all sources is effectively connected with the conduct of a trade or business within the United States. 80 Stat. 1559 “(3) Exception.— Paragraph (1) shall not apply to any dividends if an election under section 1562 is effective for either— “(A) the taxable year of the domestic corporation in which such dividends are received, or “(B) the taxable year of the foreign corporation out of the earnings and profits of which such dividends are paid.” (2) Subsection (a) of such section 245 is amended by adding at the end thereof (after the sentence added by subsection (d)(4)) the following new sentence: “For purposes of paragraph (2), there shall not be taken into account any taxable year within such uninterrupted period if, with respect to dividends paid out of the earnings and profits of such year, the deduction provided by subsection (b) would be allowable.” (3) Subsection (c) of such section 245 (as redesignated by paragraph (1)) is amended by striking out “subsection (a)” and inserting in lieu thereof “subsections (a) and (b)”. (f) Distributions of Certain Foreign Corporations.— Section 301(b)(1)(C) (relating to certain corporate distributees of foreign corporations) is amended— (1) by striking out “gross income from sources within the United States” in clause (i) and inserting in lieu thereof “gross income, which is effectively connected with the conduct of a trade or business within the United States”; (2) by striking out “gross income from sources without the United States” in clause (ii) and inserting in lieu thereof “gross income which is not effectively connected with the conduct of a trade or business within the United States”; and (3) by adding at the end thereof the following new sentences: “For purposes of clause (i), the gross income of a foreign corporation for any period before its first taxable year beginning after December 31, 1966, which is effectively connected with the conduct of a trade or business within the United States is an amount equal to the gross income for such period from sources within the United States. For purposes of clause (ii), the gross income of a foreign corporation for any period before its first taxable year beginning after December 31, 1966, which is not effectively connected with the conduct of a trade or business within the United States is an amount equal to the gross income for such period from sources without the United States.” (g) Unrelated Business Taxable Income.—The last sentence of section 512(a) (relating to definition) is amended to read as follows: “In the case of an organization described in section 511 which is a foreign organization, the unrelated business taxable income shall be its unrelated business taxable income which is effectively connected with the conduct of a trade or business within the United States.” (h) Corporations Subject to Personal Holding Company Tax.— (1) Paragraph (7) of section 542(c) (relating to corporations not subject to personal holding company tax) is amended to read as follows: “(7) a foreign corporation (other than a corporation which has income to which section 543(a)(7) applies for the taxable year), if all of its stock outstanding during the last half of the taxable year is owned by nonresident alien individuals, whether directly or indirectly through foreign estates, foreign trusts, foreign partnerships, or other foreign corporations;”. (2) Section 543(b)(1) (relating to definition of ordinary gross income) is amended— (A) by striking out “and” at the end of subparagraph (A), 80 Stat. 1560 (B) by striking out the period at the end of subparagraph (B) and inserting in lieu thereof “, and”, and (C) by inserting after subparagraph (B) the following new subparagraph: “(C) in the case of a foreign corporation all of the outstanding stock of which during the last half of the taxable year is owned by nonresident alien individuals (whether directly or indirectly through foreign estates, foreign trusts, foreign partnerships, or other foreign corporations), all items of income which would, but for this subparagraph, constitute personal holding company income under any paragraph of subsection (a) other than paragraph (7) thereof:” (3) Section 545 (relating to definition of undistributed personal holding company income) is amended— (A) by striking out subsection (a) and inserting in lieu thereof the following: “(a) Definition.— For purposes of this part, the term ‘undistributed personal holding company income’ means the taxable income of a personal holding company adjusted in the manner provided in subsections (b), (c), and (d), minus the dividends paid deduction as defined in section 561. In the case of a personal holding company which is a foreign corporation, not more than 10 percent in value of the outstanding stock of which is owned (within the meaning of section 958(a)) during the last half of the taxable year by United States persons, the term ‘undistributed personal holding company income’ means the amount determined by multiplying the undistributed personal holding company income (determined without regard to this sentence) by the percentage in value of its outstanding stock which is the greatest percentage in value of its outstanding stock so owned by United States persons on any one day during such period.”; and (B) by adding at the end thereof the following new subsection: “(d) Certain Foreign Corporations.—In the case of a foreign corporation all of the outstanding stock of which during the last half of the taxable year is owned by nonresident alien individuals (whether directly or indirectly through foreign estates, foreign trusts, foreign partnerships, or other foreign corporations), the taxable income for purposes of subsection (a) shall be the income which constitutes personal holding company income under section 543(a)(7), reduced by the deductions attributable to such income, and adjusted, with respect to such income, in the manner provided in subsection (b).” (4) (A) Subchapter B of chapter 68 (relating to assessable penalties) is amended by adding at the end thereof the following new section: “SEC. 6683. FAILURE OF FOREIGN CORPORATION TO FILE RETURN OF PERSONAL HOLDING COMPANY TAX. “Any foreign corporation which— “(1) is a personal holding company for any taxable year, and “(2) fails to file or to cause to be filed with the Secretary or his delegate a true and accurate return of the tax imposed by section 541, shall, in addition to other penalties provided by law, pay a penalty equal to 10 percent of the taxes imposed by chapter 1 (including the tax imposed by section 541) on such foreign corporation for such taxable year.” (B) The table of sections for such subchapter B is amended by adding at the end thereof the following new item: “Sec. 6683. Failure of foreign corporation to file return of personal holding company tax.” 80 Stat. 1561 (i) Amendments With Respect to Foreign Corporations Carrying on Insurance Business in United States.— (1) Section 842 (relating to computation of gross income) is amended to read as follows: “SEC. 842. FOREIGN CORPORATIONS CARRYING ON INSURANCE BUSINESS. “If a foreign corporation carrying on an insurance business within the United States would qualify under part I, II, or III of this subchapter for the taxable year if (without regard to income not effectively connected with the conduct of any trade or business within the United States) it were a domestic corporation, such corporation shall be taxable under such part on its income effectively connected with its conduct of any trade or business within the United States. With respect to the remainder of its income, which is from sources within the United States, such a foreign corporation shall be taxable as provided in section 881.” (2) The table of sections for part IV of subchapter L of chapter 1 is amended by striking out the item relating to section 842 and inserting in lieu thereof the following: “Sec. 842. Foreign corporations carrying on insurance business.” (3) Section 819 (relating to foreign life insurance companies) is amended— (A) by striking out subsections (a) and (d) and by redesignating subsections (b) and (c) as subsections (a) and (b), (B) by striking out “In the case of any company described in subsection (a),” in subsection (a)(1)(as redesignated by subparagraph (A)) and inserting in lieu thereof “In the case of any foreign corporation taxable under this part,”, (C) by striking out “subsection (c)” in the last sentence of subsection (a)(2)(as redesignated by subparagraph (A)) and inserting in lieu thereof “subsection (b)”, (D) by adding at the end of subsection (a)(as redesignated by subparagraph (A)) the following new paragraph: “(3) Reduction of section 881 tax.— In the case of any foreign corporation taxable under this part, there shall be determined— “(A) the amount which would be subject to tax under section 881 if the amount taxable under such section were determined without regard to sections 103 and 894, and “(B) the amount of the reduction provided by paragraph (1). The tax under section 881 (determined without regard to this paragraph) shall be reduced (but not below zero) by an amount which is the same proportion of such tax as the amount referred to in subparagraph (B) is of the amount referred to in subparagraph (A); but such reduction in tax shall not exceed the increase in tax under this part by reason of the reduction provided by paragraph (1).”, (E) by striking out “for purposes of subsection (a)” each place it appears m subsection (b)(as redesignated by subparagraph (A)) and inserting in lieu thereof “with respect to a foreign corporation”, (F) by striking out “foreign life insurance company” each place it appears in such subsection (b) and inserting in lieu thereof “foreign corporation”, (G) by striking out “subsection (b)(2)(A)” each place it appears in such subsection (b) and inserting in lieu thereof “subsection (a)(2)(A)”, 80 Stat. 1562 (H) by striking out “subsection (b)(2)(B)” in paragraph (2)(B)(ii) of such subsection (b) and inserting in lieu thereof “subsection (a)(2)(B)”,and (I) by adding at the end thereof the following new subsection: “(c) Cross Reference.— “For taxation of foreign corporations carrying on life insurance business within the United States, see section 842.” (4) Section 821 (relating to tax on mutual insurance companies to which part II applies) is amended— (A) by striking out subsection (e) and by redesignating subsections (f) and (g) as subsections (e) and (f), and (B) by adding at the end of subsection (f)(as redesignated by subparagraph (A)) the fallowing: “(3) For taxation of foreign corporations carrying on an insurance business within the United States, see section 842.” (5) Section 822 (relating to determination of taxable investment income) is amended by striking out subsection (e) and by redesignating subsection (f) as subsection (e). (6) Section 831 (relating to tax on certain other insurance companies) is amended— (A) by striking out subsection (b) and by redesignating subsection (c) as subsection (b),and (B) by amending subsection (d) to read as follows: “(c) Cross References.— “(1) For alternative tax in case of capital gains, see section 1201(a). “(2) For taxation of foreign corporations carrying on an insurance business within the United States, see section 842.” (7) Section 832 (relating to insurance company taxable income) is amended by striking out subsection (d) and by redesignating subsection (e) as subsection (d). (8) The second sentence of section 841 (relating to credit for foreign taxes) is amended by striking out “sentence,” and inserting in lieu thereof “sentence (and for purposes of applying section 906 with respect to a foreign corporation subject to tax under this subchapter),”. (j) Subpart F Income.— Section 952(b) (relating to exclusion of United States income) is amended to read as follows: “(b) Exclusion of United States Income.— In the case of a controlled foreign corporation, subpart F income does not include any item of income from sources within the United States which is effectively connected with the conduct by such corporation of a trade or business within the United States unless such item is exempt from taxation (or is subject to a reduced rate of tax) pursuant to a treaty obligation of the United States.” (k) Gain From Certain Sales or Exchanges of Stock in Certain Foreign Corporations.— Paragraph (4) of section 1248(d) (relating to exclusions from earnings and profits) is amended to read as follows: “(4) United states income.— Any item includible in gross income of the foreign corporation under this chapter— “(A) for any taxable year beginning before January 1, 1967, as income derived from sources within the United States of a foreign corporation engaged in trade or business within the United States, or “(B) for any taxable year beginning after December 31, 1966, as income effectively connected with the conduct by such corporation of a trade or business within the United States. 80 Stat. 1563 This paragraph shall not apply with respect to any item which is exempt from taxation (or is subject to a reduced rate of tax) pursuant to a treaty obligation of the United States.” (l) Declaration of Estimated Income Tax by Corporations.— Section 6016 (relating to declarations of estimated income tax by corporations) is amended by redesignating subsection (f) as subsection (g) and by inserting after subsection (e) the following new subsection: “(f) Certain Foreign Corporations.— For purposes of this section and section 6655, in the case of a foreign corporation subject to taxation under section 11 or 1201(a), or under subchapter L of chapter 1, the tax imposed by section 881 shall be treated as a tax imposed by section 11.” (m) Technical Amendments.— (1) Section 884 is amended to read as follows: “SEC. 884. CROSS REFERENCES. “(1) For special provisions relating to unrelated business income of foreign educational, charitable, and certain other exempt organizations, see section 512(a). “(2) For special provisions relating to foreign corporations carrying on an insurance business within the United States, see section 842. “(3) For rules applicable in determining whether any foreign corporation is engaged in trade or business within the United States, see section 864(b). “(4) For adjustment of tax in case of corporations of certain foreign countries, see section 896. “(5) For allowance of credit against the tax in case of a foreign corporation having income effectively connected with the conduct of a trade or business within the United States, see section 906. “(6) For withholding at source of tax on income of foreign corporations, see section 1442.” (2) Section 953(b)(3)(F) is amended by striking out “832(b)(5)” and inserting in lieu thereof “832(c)(5)”. (3) Section 1249(a) is amended by striking out “Except as provided in subsection (c), gain” and inserting in lieu thereof “Gain”. (n) Effective Dates.— The amendments made by this section (other than subsection (k)) shall apply with respect to taxable years beginning after December 31, 1966. The amendment made by subsection (k) shall apply with respect to sales or exchanges occurring after December 31, 1966.