Get Form 5735 (rev. October 1998). Possessions Corporation Tax Credit (under Sections 936 And 30a)

Exemption from the Foreign Tax Credit Limit Your qualified foreign taxes for the tax year are not more than $300 ($600 if filing a joint return). All of your gross foreign income and the foreign taxes are reported to you on a payee statement (such as a Form 1099-DIV or 1099-INT).

The Foreign Tax Credit (FTC) is one method U.S. expats can use to offset foreign taxes paid abroad dollar-for-dollar. Tax credits in general work like this: If you owe the U.S. government $1,500 in taxes and you have a $500 tax credit, you'll end up only owing $1,000 — and the Foreign Tax Credit is no different.

You can claim a credit only for foreign taxes that are imposed on you by a foreign country or U.S. possession. Generally, only income, war profits and excess profits taxes qualify for the credit.

Generally, the following four tests must be met for any foreign tax to qualify for the credit: The tax must be imposed on you. You must have paid or accrued the tax. The tax must be the legal and actual foreign tax liability. The tax must be an income tax (or a tax in lieu of an income tax)

The minimum tax credit is generally the amount of adjusted net minimum tax for all tax years reduced by the minimum tax credit for all prior tax years ( Code Sec. 53).

§960, Foreign Tax Credit Rules If income is included in the gross income of a domestic corporation that is a U.S. shareholder of a CFC, the deemed-paid credit is the amount of the foreign corporation's foreign income taxes properly attributable to the subpart F income or GILTI inclusion (IRC § 960(a), (d)).

The principal such provision was Section 936 of the federal tax code, which allowed subsidiaries of U.S. firms operating in Puerto Rico to pay no federal taxes on their Puerto Rican profits, even if those profits were returned to the United States (i.e., to the parent company in the states).