Final regulations (T.D. 9634) providing guidance on determining the amount of taxes paid for purposes of the foreign tax credit (FTC) has been issued by the IRS. These final regulations adopt without substantive changes, the proposed regulations (REG-126519-11).
Amounts paid to a foreign taxing authority that are attributable to a “structured passive investment arrangement” (SPIA) will not be treated as an amount of tax paid for purposes of the FTC under Reg. Section 1.901-2(e)(5)(iv) of the final regulations (the 2011 Final Regulations) (T.D. 9535).
The Final Regulations describe six conditions that, if satisfied will result in an arrangement being treated as an SPIA.
The first of these conditions is that the arrangement uses an entity which meets the two requirements:
(1) substantially all of the entity’s gross income, as determined under US tax principles, is attributable to passive investment income, and substantially all of the entity’s assets are held to produce such passive investment income; and
(2) There is a foreign tax payment attributable to income of the entity, as determined under the laws of the foreign country to which such foreign payment is made.
The 2011 Final Regulations eliminated the exception for withholding taxes imposed on distributions or payments to US parties.
