Title IV — Taxation of foreign income

“H Special Rules for Allocation of Foreign-Related Deductions

“975. Deductions allocated to deferred foreign income may not offset United States source income

“(a) Current year deductions—For purposes of this chapter, foreign-related deductions for any taxable year—

“(1) shall be taken into account for such taxable year only to the extent that such deductions are allocable to currently-taxed foreign income, and

“(2) to the extent not so allowed, shall be taken into account in subsequent taxable years as provided in subsection (b).

“(b) Deductions related to repatriated deferred foreign income

“(1) In general—If there is repatriated foreign income for a taxable year, the portion of the previously deferred deductions allocated to the repatriated foreign income shall be taken into account for the taxable year as a deduction allocated to income from sources outside the United States. Any such amount shall not be included in foreign-related deductions for purposes of applying subsection (a) to such taxable year.

“(2) Portion of previously deferred deductions—For purposes of paragraph (1), the portion of the previously deferred deductions allocated to repatriated foreign income is—

“(A) the amount which bears the same proportion to such deductions, as

“(B) the repatriated income bears to the previously deferred foreign income.

“(c) Definitions and special rule—For purposes of this section—

“(1) Foreign-related deductions—The term foreign-related deductions means the total amount of deductions and expenses which would be allocated or apportioned to gross income from sources without the United States for the taxable year if both the currently-taxed foreign income and deferred foreign income were taken into account.

“(2) Currently-taxed foreign income—The term currently-taxed foreign income means the amount of gross income from sources without the United States for the taxable year (determined without regard to repatriated foreign income for such year).

“(3) Deferred foreign income—The term deferred foreign income means the excess of—

“(A) the amount that would be includible in gross income under subpart F of this part for the taxable year if—

“(i) all controlled foreign corporations were treated as one controlled foreign corporation, and

“(ii) all earnings and profits of all controlled foreign corporations were subpart F income (as defined in section 952), over

“(B) the sum of—

“(i) all dividends received during the taxable year from controlled foreign corporations, plus

“(ii) amounts includible in gross income under section 951(a).

“(4) Previously deferred foreign income—The term previously deferred foreign income means the aggregate amount of deferred foreign income for all prior taxable years to which this part applies, determined as of the beginning of the taxable year, reduced by the repatriated foreign income for all such prior taxable years.

“(5) Repatriated foreign income—The term repatriated foreign income means the amount included in gross income on account of distributions out of previously deferred foreign income.

“(6) Previously deferred deductions—The term previously deferred deductions means the aggregate amount of foreign-related deductions not taken into account under subsection (a) for all prior taxable years (determined as of the beginning of the taxable year), reduced by any amounts taken into account under subsection (b) for such prior taxable years.

“(7) Treatment of certain foreign taxes

“(A) Paid by controlled foreign corporation—Section 78 shall not apply for purposes of determining currently-taxed foreign income and deferred foreign income.

“(B) Paid by taxpayer—For purposes of determining currently-taxed foreign income, gross income from sources without the United States shall be reduced by the aggregate amount of taxes described in the applicable paragraph of section 901(b) which are paid by the taxpayer (without regard to sections 902 and 960) during the taxable year.

“(d) Application of section—This section—

“(1) shall be applied before subpart A, and

“(2) shall be applied separately with respect to the categories of income specified in section 904(d)(1).”

“(b) Inverted corporations treated as domestic corporations

“(1) In general—Notwithstanding section 7701(a)(4), a foreign corporation shall be treated for purposes of this title as a domestic corporation if—

“(A) such corporation would be a surrogate foreign corporation if subsection (a)(2) were applied by substituting “80 percent” for “60 percent”, or

“(B) such corporation is an inverted domestic corporation.

“(2) Inverted domestic corporation—For purposes of this subsection, a foreign corporation shall be treated as an inverted domestic corporation if, pursuant to a plan (or a series of related transactions)—

“(A) the entity completes after May 8, 2014, the direct or indirect acquisition of—

“(i) substantially all of the properties held directly or indirectly by a domestic corporation, or

“(ii) substantially all of the assets of, or substantially all of the properties constituting a trade or business of, a domestic partnership, and

“(B) after the acquisition, either—

“(i) more than 50 percent of the stock (by vote or value) of the entity is held—

“(I) in the case of an acquisition with respect to a domestic corporation, by former shareholders of the domestic corporation by reason of holding stock in the domestic corporation, or

“(II) in the case of an acquisition with respect to a domestic partnership, by former partners of the domestic partnership by reason of holding a capital or profits interest in the domestic partnership, or

“(ii) the management and control of the expanded affiliated group which includes the entity occurs, directly or indirectly, primarily within the United States, and such expanded affiliated group has significant domestic business activities.

“(3) Exception for corporations with substantial business activities in foreign country of organization—A foreign corporation described in paragraph (2) shall not be treated as an inverted domestic corporation if after the acquisition the expanded affiliated group which includes the entity has substantial business activities in the foreign country in which or under the law of which the entity is created or organized when compared to the total business activities of such expanded affiliated group. For purposes of subsection (a)(2)(B)(iii) and the preceding sentence, the term substantial business activities shall have the meaning given such term under regulations in effect on May 8, 2014, except that the Secretary may issue regulations increasing the threshold percent in any of the tests under such regulations for determining if business activities constitute substantial business activities for purposes of this paragraph.

“(4) Management and control—For purposes of paragraph (2)(B)(ii)—

“(A) In general—The Secretary shall prescribe regulations for purposes of determining cases in which the management and control of an expanded affiliated group is to be treated as occurring, directly or indirectly, primarily within the United States. The regulations prescribed under the preceding sentence shall apply to periods after May 8, 2014.

“(B) Executive officers and senior management—Such regulations shall provide that the management and control of an expanded affiliated group shall be treated as occurring, directly or indirectly, primarily within the United States if substantially all of the executive officers and senior management of the expanded affiliated group who exercise day-to-day responsibility for making decisions involving strategic, financial, and operational policies of the expanded affiliated group are based or primarily located within the United States. Individuals who in fact exercise such day-to-day responsibilities shall be treated as executive officers and senior management regardless of their title.

“(5) Significant domestic business activities—For purposes of paragraph (2)(B)(ii), an expanded affiliated group has significant domestic business activities if at least 25 percent of—

“(A) the employees of the group are based in the United States,

“(B) the employee compensation incurred by the group is incurred with respect to employees based in the United States,

“(C) the assets of the group are located in the United States, or

“(D) the income of the group is derived in the United States,”