US Source Effectively Connected Income Exclusion

§ 952. Subpart F income defined(a) In generalFor purposes of this subpart, the term “subpart F income” means, in the case of any controlled foreign corporation, the sum of—(1) insurance income (as defined under section 953), (2) the foreign base company income (as determined under section 954), (3) an amount equal to the product of—(A) the income of such corporation other than income which—(i) is attributable to earnings and profits of the foreign corporation included in the gross income of a United States person under section 951 (other than by reason of this paragraph), or (ii) is described in subsection (b), multiplied by (B) the international boycott factor (as determined under section 999), (4) the sum of the amounts of any illegal bribes, kickbacks, or other payments (within the meaning of section 162(c)) paid by or on behalf of the corporation during the taxable year of the corporation directly or indirectly to an official, employee, or agent in fact of a government, and (5) the income of such corporation derived from any foreign country during any period during which section 901(j) applies to such foreign country. The payments referred to in paragraph (4) are payments which would be unlawful under the Foreign Corrupt Practices Act of 1977 if the payor were a United States person. For purposes of paragraph (5), the income described therein shall be reduced, under regulations prescribed by the Secretary, so as to take into account deductions (including taxes) properly allocable to such income. (b) Exclusion of United States incomeIn 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. For purposes of this subsection, any exemption (or reduction) with respect to the tax imposed by section 884 shall not be taken into account. (c) Limitation(1) In general(A) Subpart F income limited to current earnings and profitsFor purposes of subsection (a), the subpart F income of any controlled foreign corporation for any taxable year shall not exceed the earnings and profits of such corporation for such taxable year. (B) Certain prior year deficits may be taken into account(i) In generalThe amount included in the gross income of any United States shareholder under section 951(a)(1)(A) for any taxable year and attributable to a qualified activity shall be reduced by the amount of such shareholder’s pro rata share of any qualified deficit.