TAXATION OF EARNINGS AND PROFITS OF CONTROLLED FOREIGN CORPORATIONS AND THEIR SHAREHOLDERS.

SEC. 602. TAXATION OF EARNINGS AND PROFITS OF CONTROLLED FOREIGN CORPORATIONS AND THEIR SHAREHOLDERS. (a) Repeal of Minimum Distribution Exception to Requirement of Current Taxation of Subpart F Income.— (1) Repeal of minimum distribution provisions.— Section 963 (relating to receipt of minimum distributions by domestic corporations) is hereby repealed. (2) Certain distributions by controlled foreign corporations to regulated investment companies treated as dividends.— Subsection (b) of section 851 (relating to limitations on definition of regulated investment company) is amended by adding at the end thereof the following new sentence: “For purposes of paragraph (2), there shall be treated as dividends amounts included in gross income under section 951(a)(1)(A)(i) for the taxable year to the extent that, under section 959(a)(1), there is a distribution out of the earnings and profits of the taxable year which are attributable to the amounts so included.” (3) Confirming amendments.— (A) The table of sections for subpart F of part III of subchapter N of chapter 1 is amended by striking out the item relating to section 963. (B) Subparagraph (A)(i) of section 951(a)(1) (relating to general rule for amounts included in gross income of United States shareholders) is amended Dy striking out “except as provided in section 963.”. (b) Limitation on Definition of Foreign Base Company Sales Income.— Paragraph (1) of section 954(d) (relating to definition of foreign base company sales income) is amended by adding at the end thereof the following new sentence: “For purposes of this subsection, personal property does not include agricultural commodities which are not grown in the United States in commercially marketable quantities.” (c) Repeal of Exception to Requirement of Current Taxation of Subpart F Income for Reinvestment in Less Developed Countries.— (1) Repeal of section 954(b)(1).— Paragraph (1) of subsection (b) of section 954 (relating to exclusions and special rules regarding foreign base company income) is hereby repealed. (2) Repeal of section 954(f).— Subsection (f) of section 954 (relating to increase in qualified investments in less developed countries) is hereby repealed. (3) Amendment of section 951(a)(1)(A)(ii).— Clause (ii) of section 951(a)(1)(A) is amended by striking out “(determined under section 955(a)(3))” and inserting in lieu thereof “(determined under section 955(a)(3) as in effect before the enactment of the Tax Reduction Act of 1975)”. (4) Repeal of section 951(a)(b).— Paragraph (3) of section 951(a) (relating to limitation on pro rata share of previously excluded subpart F income withdrawn from investment) is hereby repealed. 89 STAT. 59 (5) Repeal of section ass.— Section 955 (relating to withdrawal of previously excluded subpart F income from qualified investment) is hereby repealed, (6) Less developed country corporation defined.— Subsection (d) of section 902 is amended to read as follows: “(d) Less Developed Country Corporation Defined.— For purposes of this section, the term ‘less developed country corporation’ means— “(1) a foreign corporation which, for its taxable year, is a less developed country corporation within the meaning of paragraph (8) or (4), and “(2) a foreign corporation which owns 10 percent or more of the total combined vol big power of all classes of stock entitled to vote of a foreign corporation which is a less developed country corporation within the meaning of paragraph (3), and— “(A) 80 percent or more of the gross income of which for its taxable year meets the requirement of paragraph (3)(A), and “(B) 80 percent or more in value of the assets of which on each day of such year consists of property described in paragraph (3)(B). A foreign corporation which is a less developed country corporation for its first taxable year beginning after December 31, 1962, shall, for purposes of this section, he treated as having been a less developed country corporation for each of its taxable years beginning before January 1, 1963. “(3) The term ‘less developed country corporation’ means a foreign corporation which during the taxable year is engaged in the active conduct of one or more trades or businesses and— “(A) 80 percent or more of the gross income of which for the taxable year is derived from sources within less developed countries: and “(B) 80 percent or more in value of the assets of which on each day of the taxable year consists of— “(i) property used in such trades or businesses and located in less developed countries. “(ii) money, and deposits with persons carrying on the banking business. “(iii) stock, and obligations which, at the time of their acquisition, have a maturity of one year or more, of any other less developed country corporation. “(iv) an obligation of a less developed country, “(v) an investment which is required because of restrictions imposed by a less developed country, and “(vi) property described in section 956(b)(2). For purposes of subparagraph (A), the determination as to whether income is derived from sources within less developed countries shall be made under regulations prescribed by the Secretary or his delegate. “(4) The term ‘less developed country corporation’ also means a foreign corporation— “(A) 80 percent or more of the gross income of which for the taxable year consists of— “(i) gross income derived from, or in connection with, the using (or hiring or leasing for use) in foreign commerce of aircraft or vessels registered under the laws of a less developed country, or from, or in connection with, the performance of services directly related to use of89 STAT. 60 such aircraft or vessels, or from the sale or exchange of such aircraft or vessels, and “(ii) dividends and interest received from foreign corporations which are less developed country corporations within the meaning of this paragraph and 10 percent or more of the total combined voting power of all classes of stock of which are owned by the foreign corporation, and gain from the sale or exchange of stock or obligations of foreign corporations which are such less developed country corporations, and “(B) 80 percent or more of the assets of which on each day of the taxable year consists of (i) assets used, or held for use, for or in connection with the production of income described in subparagraph (A), and (ii) property described in section 956(b)(2). “(5) The term ‘less developed country’ means (in respect to any foreign corporation) any foreign country (other than an area within the Sino-Soviet bloc) or any possession of the United States with respect to which, on the first day of the taxable year, there is in effect an Executive order by the President of the United States designating such country or possession as an economically less developed country for purposes of this section. For purposes of the preceding sentence, an overseas territory, department, province, or possession may be treated as a separate country. No designation shall be made under this paragraph with respect to— Australia Luxembourg Austria Monaco Belgium Netherlands Canada New Zealand Denmark Norway France Union of South Africa Germany (Federal Republic) San Marino Hong Kong Sweden Italy Switzerland Japan United Kingdom Liechtenstein After the President has designated any foreign country or any possession of the United States as an economically less developed country for purposes of this section, he shall not terminate such designation (either by issuing an Executive order for that purpose or by issuing an Executive order under the first sentence of this paragraph which has the effect of terminating such designation) unless, at least 30 days prior to such termination, he has notified the Senate and the House of Representatives of Iris intention to terminate such designation. Any designation in effect, on March 26, 1975, under section 955(c)(3) (as in effect, before the enactment of the Tax Reduction Act of 1975) shall be treated as made under this paragraph.” (7) Clerical amendment.— The table of sections for subpart F of part III of subchapter N of chapter 1 is amended by striking out the item relating to section 955. (d) Shipping Profits of Controlled Foreign Corporation To Be Taxed Currently Except to Extent Reinvested in Shipping Operations.— (1) Shipping profits included in gross income of united states shareholders.— (A) Section 954(a) (relating to foreign base company income) is amended by striking out “and” at the end of para-89 STAT. 61graph (2), by striking out the period at the end of paragraph (3) and inserting in lieu thereof “, and”, and by adding at the end thereof the following new paragraph: “(4) the foreign base company shipping income for the taxable year (determined under subsection (f) and reduced as provided in subsection (b)(5)).” (B) Paragraph (2) of section 954(b) is amended to read as follows: “(2) Exclusion fob reinvested stuffing income.— For purposes of subsection (a), foreign base company income does not include foreign base company shipping income to the extent that the amount of such income does not exceed the increase for the taxable year in qualified investments in foreign base company shipping operations of the controlled foreign corporation (as determined under subsection (g)).” (C) Subparagraphs (A) and (B) of section 954(b)(3) are each amended by striking out “paragraphs (1) and (5)” and inserting in lieu thereof “paragraphs (2) and (5)”. (D) Subparagraph (B) of section 954(b)(3) is amended by striking out “paragraphs (1), (2),” and inserting in lieu thereof “paragraph (2),”. (E) Paragraph (5) of section 954(b) is amended by striking out “and the foreign base company services income” and inserting in lieu thereof “the foreign base company services income, and the foreign base company shipping income”. (F) Section 954(b) is amended by adding at the end thereof the following new paragraph: “(6) Special rules tor foreign base company shipping income.— Income of a corporation which is foreign base company shipping income under paragraph (4) of subsection (a) (determined without regard to the exclusion under paragraph (2) of this subsection)— “(A) shall not be considered foreign base company income of such corporation under any other paragraph of subsection (a) and “(B) if distributed through a chain of ownership described under section 958(a), shall not be included in foreign base company income of another controlled foreign corporation in such chain.” (G) Section 954 is amended by adding at the end thereof the following new subsections: “(f) Foreign Base Company Shipping Income.— For purposes of subsection (a)(4), the term ‘foreign base company shipping income’ means income derived from, or in connection with, the use (or hiring or leasing for use) of any aircraft or vessel in foreign commerce, or from, or in connection with, the performance of services directly related to the use of any such aircraft, or vessel, or from the sale, exchange, or other disposition of any such aircraft or vessel. Such term includes, but is not limited to— “(1) dividends and interest received from a foreign corporation in respect, of which taxes are deemed paid under section 902, and gain from the sale, exchange, or other disposition of stock or obligations of such a foreign corporation to the extent that such dividends, interest, and gains are attributable to foreign base company shipping income, and “(2) that portion of the distributive share of the income of a partnership attributable to foreign base company shipping income. 89 STAT. 62 “(g) Increase in Qualified Investments in Foreign Base Company Shipping Operations.— For purposes of subsection (b)(2), the increase for any taxable year in qualified investments in foreign base company shipping operations of any controlled foreign corporation is the amount by which— “(1) the qualified investments in foreign base company shipping operations (as defined in section 955(b)) of the controlled foreign corporation at the close of the taxable year, exceed “(2) the qualified investments in foreign base company shipping operations (as so defined) of the controlled foreign corporation at the close of the preceding taxable year.” (2) Amounts included in gross income or united states shareholders.— (A) Subparagraph (A) of section 951(a)(1) is amended by striking out “and” at the end of clause (i), by striking out the semicolon at the end of clause (ii) and inserting in lieu thereof a comma, and by adding at the end thereof the following new clause: “(iii) his pro rata share (determined under section 955 (a)(3)) of the corporal ion’s previously excluded subpart F income withdrawn from foreign base company shipping operations for such year; and”. (B) Section 951(a) is amended by inserting after paragraph (2) the following new paragraph: “(3) Limitation on fro rata share of previously excluded subpart f income withdrawn from investment.— For purposes of paragraph (1)(A)(iii), the pro rata share of any United States shareholder of the previously excluded subpart F income of a controlled foreign corporation withdrawn from investment in foreign base company shipping operations shall not exceed an amount— “(A) which bears the same ratio to his pro rata share of such income withdrawn (as determined under section 955(a)(3)) for the taxable year, as “(B) the part of such year during which the corporation is a controlled foreign corporation bears to the entire year.” (3) Withdrawal of previously excluded subpart f income from qualified investment. (A) Subpart F of part III of subchapter N of chapter 1 is amended by inserting after section 954 the following new section: “SEC. 955. WITHDRAWAL OF PREVIOUSLY EXCLUDED SUBPART F INCOME FROM QUALIFIED INVESTMENT. “(a) General Rules.— “(1) Amount withdrawn.— For purposes of this subpart, the amount of previously excluded subpart F income of any controlled foreign corporation withdrawn from investment in foreign base company shipping operations for any taxable year is an amount equal to the decrease in the amount of qualified investments in foreign base company shipping operations of the controlled foreign corporation for such year, but only to the extent that the amount of such decrease does not exceed an amount equal to— “(A) the sum of the amounts excluded under section 954(b)(2) from the foreign base company income of such corporation for all prior taxable years, reduced by “(B) the sum of the amounts of previously excluded subpart F income withdrawn from investment in foreign base89 STAT. 63 company shipping operations of such corporation determined under this subsection for all prior taxable years. “(2) Decrease in qualified investments.— For purposes of paragraph (1), the amount of the decrease in qualified investments in foreign base company shipping operations of any controlled foreign corporation for any taxable year is the amount by which— “(A) the amount of qualified investments in foreign base company shipping operations of the controlled foreign corporation at the close of the preceding taxable year, exceeds “(B) the amount of qualified investments in foreign base company shipping operations of the controlled foreign corporation at the close of the taxable year, to the extent that the amount of such decrease does not exceed the sum of the earnings and profits for the taxable year and the earnings and profits accumulated for prior taxable years beginning after December 31, 1975, and the amount of previously excluded subpart F income invested in less developed country corporations described in section 955(c)(2) (as in effect before the enactment of the Tax Reduction Act, of 1975) to the extent attributable to earnings and profits accumulated for taxable years beginning after December 31, 1962. For purposes of this paragraph, if qualified investments in foreign base company shipping operations are disposed of by the controlled foreign corporation during the taxable year, the amount of the decrease in qualified investments in foreign base company shipping operations of such controlled foreign corporation for such year shall be reduced by an amount equal to the amount (if any) by which the losses on such dispositions during such year exceed the gains on such dispositions during such year. “(3) Pro rata share of amount withdrawn.— Tn the case of any United States shareholder, the pro rata share of the amount of previously excluded subpart F income of any controlled foreign corporation withdrawn from investment in foreign base company shipping operations for any taxable year is his pro rata share of the amount determined under paragraph (1). “(b) Qualified Investments in Foreign Base Company Shipping Operations.— “(1) In general.— For purposes of this subpart, the term ‘qualified investments in foreign base company shipping operations’ means investments in— “(A) any aircraft, or vessel used in foreign commerce, and “(B) other assets which are used in connection with the performance of services directly related to the use of any such aircraft or vessel. Such term includes, but is not limited to, investments by a controlled foreign corporation in stock or obligations of another controlled foreign corporation which is a related person (within the meaning of section 954(d)(3)) and which holds assets described in the preceding sentence, but only to the extent that such assets are so used. “(2) Qualified investments by related persons.— For purposes of determining the amount of qualified investments in foreign base company shipping operations, an investment (or a decrease in investment) in such operations by one or more controlled foreign corporations may under regulations prescribed by the Secretary or his delegate, be treated as an investment (or a decrease in investment) by another corporation which is a controlled foreign corporation and is a related person (as defined89 STAT. 64 in section 954(d)(3)) with respect to the Corporation actually making or withdrawing the investment. “(3) Special rule.— For purposes of this subpart, a United States shareholder of a controlled foreign corporation may, under regulations prescribed by the Secretary or Iris delegate, elect to make the determinations under subsection (a)(2) of this section and under subsection (g) of section 954 as of the close of the years following the years referred to in such subsections, or as of the close of such longer period of time as such regulations may permit, in lieu of on the last day of such years. Any election under tins paragraph made with respect to any taxable year shall apply to such year and to all succeeding taxable years unless the Secretary or his delegate consents to the revocation of such election. “(4) Amount attributable to property.— The amount taken into account under this subpart with respect to any property described in paragraph (1) shall be its adjusted basis, reduced by any liability to which such property is subject. “(5) Income excluded under prior law.— Amounts invested in less developed country corporations described in section 955(c)(2) (as in effect before the enactment of the Tax Reduction Act of 1975) shall be treated as qualified investments in foreign base company shipping operations and shall not be treated as investments in less developed countries for purposes of section 951(a)(1)(A)(ii).” (B) The table of sections of subpart F of part III of subchapter N of chapter 1 is amended by inserting after the item relating to section 954 the following new item: “Sec. 955. Withdrawal of previously excluded subpart F income from qualified investment.” (e) Exclusion From Foreign Base Company Income Where Foreign Base Company Income Is Less Than 10 Percent of Gross Income.— Paragraph (3) of section 954(b) is amended by striking out “30 percent” each place it appears and inserting in lieu thereof “10 percent”. (f) Effective Date.— The amendments made by this section shall apply to taxable years of foreign corporations beginning after December 31, 1975, and to taxable years of United States shareholders (within the meaning of 951 (b) of the Internal Revenue Code of 1954) within which or with which such taxable years of such foreign corporations end.