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Instructions for Form 1120-F 2006 Tax Year

General Instructions

This is archived information that pertains only to the 2006 Tax Year. If you
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Table of Contents

Purpose of Form

Use Form 1120-F to report the income, gains, losses, deductions, credits, and to figure the U.S. income tax liability of a foreign corporation. Also, use Form 1120-F to claim any refund that is due.

Who Must File

Unless one of the exceptions under Exceptions From Filing below applies or a special return is required (see Special Returns for Certain Organizations below), a foreign corporation must file Form 1120-F if, during the tax year, the corporation:

  • Overpaid income tax that it wants refunded.

  • Engaged in a trade or business in the United States, whether or not it had income from that trade or business.

  • Had income, gains, or losses treated as if they were effectively connected with that U.S. trade or business. (See Section II on page 10.)

  • Had income from any U.S. source (even if its income is tax exempt under an income tax treaty or code section).

Others that must file Form 1120-F include:

  • A Mexican or Canadian branch of a U.S. mutual life insurance company. The branch must file Form 1120-F on the same basis as a foreign corporation if the U.S. company elects to exclude the branch's income and expenses from its own gross income.

  • A receiver, assignee, or trustee in dissolution or bankruptcy, if that person has or holds title to virtually all of a foreign corporation's property or business. Form 1120-F is due whether or not the property or business is being operated (see Who Must Sign on page 4 for additional information).

  • An agent in the United States, if the foreign corporation has no office or place of business in the United States when the return is due.

Treaty exemption.   If the corporation does not owe any tax because it is claiming a treaty exemption and there was no withholding at source, it must still file Form 1120-F to show that the income was exempted by treaty. In this case, the corporation should only complete the identifying information at the top of page 1 and Item U at the bottom of page 5.

  If the corporation does not owe any tax and there was withholding at source, see Claim for Refund or Credit below.

Note.

An exemption from tax under Section II based on the permanent establishment article of an income tax treaty does not necessarily exempt the corporation from the branch profits tax.

Consolidated returns.   A foreign corporation may not belong to an affiliated group of corporations that files a consolidated return unless it is a Canadian or Mexican corporation maintained solely for complying with the laws of Canada or Mexico for title and operation of property.

Exceptions From Filing

A foreign corporation does not have to file Form 1120-F if any of the following apply:

  • It did not engage in a U.S. trade or business during the year, and its full U.S. tax was withheld at source.

  • Its only income is not subject to U.S. taxation under section 881(d).

  • It is a beneficiary of an estate or trust engaged in a U.S. trade or business, but would itself otherwise not need to file.

Special Returns for Certain Organizations

Instead of filing Form 1120-F, certain foreign organizations must file special returns:

  • Form 1120-L, U.S. Life Insurance Company Income Tax Return, as a foreign life insurance company.

  • Form 1120-PC, U.S. Property and Casualty Insurance Company Income Tax Return, as a foreign nonlife insurance company.

  • Form 1120-FSC, U.S. Income Tax Return of a Foreign Sales Corporation, if the corporation elected to be treated as a FSC and the election is still in effect.

Claim for Refund or Credit

If the corporation is filing Form 1120-F only as a claim for refund or credit of tax paid or withheld at source, the simplified procedure described below may be used. This procedure may be used only if the foreign corporation meets all of the following conditions for the tax year:

  • It was not engaged in a trade or business in the United States.

  • It did not have a permanent establishment in the United States.

  • It had no income effectively connected with the conduct of a U.S. trade or business.

  • Its U.S. income tax liability was fully satisfied through withholding of tax at source and the corporation owes no additional U.S. income tax.

Simplified Procedure for Claiming a Refund of U.S. Tax Withheld at Source

To make a claim for a refund, complete Form 1120-F as follows.

Page 1.   Enter the complete name, address, and employer identification number of the corporation. Check the applicable box to indicate the type of filing. Provide all the information required in items A through L.

Refund amount.   Enter on lines 1 and 4, page 1, the amount from line 11, page 2. Enter on lines 5h and 5j the amount from line 12, page 2. Enter the excess of line 5j over line 4 on lines 8 and 9. This is the amount to be refunded to you.

Signature.   An authorized officer of the corporation must sign and date the return.

Page 2.   Enter in column (b) the gross amount of each type of income received that was subject to withholding at source. Include income from foreign sources that was subject to backup withholding. Do not include income from which no U.S. tax was withheld. If the corporation is subject to backup withholding on gross proceeds from sales of securities or transactions in regulated futures contracts, enter the gross proceeds on line 10.

  Enter in columns (c) and (d), respectively, the correct rate and amount of U.S. income tax liability for each type of income reported in column (b). If the corporation is claiming a refund of U.S. tax withheld in excess of the rate provided in a tax treaty with the United States, enter the applicable treaty rate in column (c) and figure the correct U.S. income tax liability on the gross income reported in column (b).

  Enter in column (e) the U.S. tax actually withheld at source (and not refunded by the payor or the withholding agent) from each type of income reported.

   Enter on line 11 the total U.S. tax liability for the reported income.

   Enter on line 12 the total U.S. tax actually withheld from such income.

Additional information.   Complete all items at the bottom of pages 2 and 5 that apply to the corporation.

Additional Documentation Required

The corporation must attach to Form 1120-F the following:

  1. Proof of the withholding (e.g., Form 1042-S),

  2. A statement that describes the basis for the claim for refund,

  3. Any required tax certifications (e.g., Form W-8BEN), and

  4. Any additional documentation to support the claim.

Refund of backup withholding tax.   If the corporation is claiming a refund of backup withholding tax based on its status as a non-U.S. resident, it must:

  • Provide a copy of the Form 1099 that shows the amount of reportable payment and backup withholding and

  • Attach a statement, signed under penalties of perjury, that the corporation is exempt from backup withholding because it is not a U.S. corporation or other U.S. resident (e.g., Form W-8BEN).

Refunds of U.S. withholding.   If any of the following apply, attach the information requested:

  

  • If claiming a refund of U.S. withholding tax on U.S. source income, provide a copy of the Form 1042-S that shows the income and actual amount of U.S. tax withheld.

  • If claiming a refund of U.S. tax withheld from portfolio interest, include a description of the relevant debt obligation, including the name of the issuer, CUSIP number (if any), interest rate, scheduled maturity date, and the date the debt was issued. Also include a statement, signed under penalties of perjury, that the corporation is the beneficial owner of the interest income and not a U.S. corporation or other U.S. resident (e.g., Form W-8BEN).

  • If claiming a reduced rate of, or exemption from, tax based on a tax treaty, provide a certificate of entitlement to treaty benefits (e.g., Form W-8BEN). A separate statement should be provided that contains any additional representations necessary to explain the basis for the claim.

    Note.

    To claim a reduced rate of, or exemption from, tax based on a tax treaty, the corporation must generally be a resident of the particular treaty country within the meaning of the treaty and may not have a permanent establishment or fixed base in the United States.

  • If claiming an exemption from withholding on a distribution from a U.S. corporation with respect to its stock because the corporation has insufficient earnings and profits to support ordinary dividend treatment, provide a statement that identifies the distributing corporation and provides the basis for the claim.

  • If claiming an exemption from withholding on a distribution from a mutual fund or a real estate investment trust (REIT) with respect to its stock because the distribution was designated as long-term capital gain or a return of capital, provide a statement that identifies the mutual fund or REIT and provide the basis for the claim.

  • If claiming an exemption from withholding on a distribution from a U.S. corporation with respect to its stock because, in the foreign corporation's particular circumstances, the transaction qualifies as a redemption of stock under section 302, provide a statement that describes the transaction and presents the facts necessary to establish that the payment was (a) a complete redemption, (b) a disproportionate redemption, or (c) not essentially equivalent to a dividend.

Use of foreign nominees.   If the corporation received income through a foreign intermediary or nominee acting on its behalf (and a Form 1042-S or 1099 is not received), the corporation may substitute a statement from the intermediary or nominee. The statement should include the following information:

  • The gross amount(s) and type(s) of income subject to withholding,

  • The name(s) and address(es) of the U.S. withholding agent(s),

  • The U.S. taxpayer identification number of the U.S. withholding agent or payor, and

  • The name in which the tax was withheld, if different from the name of the beneficial owner claiming the refund.

When To File

Foreign Corporation With An Office in the U.S.

A foreign corporation that maintains an office or place of business in the United States must either:

  1. File Form 1120-F by the 15th day of the 3rd month after the end of its tax year or

  2. Get an extension of time to file.

Extension.   To get an extension, the corporation may either:

Note.

The corporation is still required to pay the tax due by the 15th day of the 3rd month after the end of its tax year. If it does not, the corporation must pay the interest on the late payment but is not subject to the penalty for late payment of tax if it pays the tax due by the 15th day of the 6th month after the end of its tax year.

  1. File Form 7004, Application for Automatic 6-Month Extension of Time To File Certain Business Income Tax, Information, and Other Returns, by the 15th day of the 3rd month after the end of its tax year to request a 6-month extension.

    Note.

    The extension granted by the timely filing of Form 7004 does not extend the time for payment of the tax. If the tax is paid after the 15th day of the 3rd month following the close of the corporation's tax year, the corporation must pay interest on the late payment and is subject to the penalty for late payment of tax.

  2. Get a 3-month extension by attaching to Form 1120-F the statement described in Regulations section 1.6081-5. If additional time is needed beyond the 3-month extension, then file Form 7004 before the end of the 3-month extension period to obtain up to an additional 3 months to file. If Form 7004 is not filed by the expiration of the 3-month extension period, and the corporation files its income tax return after such period, it may be liable for the penalty for late filing of return described on page 6. In no event may the total extension period exceed 6 months from the original due date of the return (i.e., Form 1120-F must be filed by the 15th day of the 9th month after the end of the corporation's tax year). See Rev. Rul. 93-85, 1993-2 C.B. 297.

  
Caution
 The options described in 1 and 2 above are mutually exclusive. If a corporation chooses the option described in 1 to extend the time to file, it may not later choose the option described in 2.

Foreign Corporation With No Office or Place of Business in the U.S.

If the foreign corporation does not maintain an office or place of business in the United States it must:

  • File Form 1120-F by the 15th day of the 6th month after the end of its tax year or

  • File Form 7004 to request a 6-month extension of time to file.

Note.

The extension does not extend the time for payment of tax. If the tax is paid after the 15th day of the 6th month after the end of its tax year, the corporation must pay interest on the late payment and a penalty for late payment of tax may apply. See Interest and Penalties on page 6.

Other Filing Requirements

  • A new corporation filing a short-period return must generally file by the 15th day of the 3rd month after the short period ends.

  • A corporation that has dissolved must generally file by the 15th day of the 3rd month after the date it dissolved.

  • If the due date of any filing falls on a Saturday, Sunday, or legal holiday, the corporation may file on the next business day.

  • Form 1120-F must be filed on a timely basis and in a true and accurate manner in order for a foreign corporation to take deductions and credits against its effectively connected income. For these purposes, Form 1120-F is generally considered to be timely filed if it is filed no later than 18 months after the due date of the current year's return. An exception may apply to foreign corporations that have yet to file Form 1120-F for the preceding tax year. Another exception may apply to foreign corporations that acted reasonably and in good faith in failing to file Form 1120-F (including a protective return). See Regulations section 1.882-4 for more information about this latter exception.

A foreign corporation is allowed the following deductions and credits regardless of whether Form 1120-F is timely filed.

  1. The charitable contributions deduction (page 3, Section II, line 19).

  2. The credit from Form 2439 (page 1, line 5f).

  3. The credit for federal tax on fuels (page 1, line 5g).

  4. U.S. income tax paid or withheld at source (page 1, line 5h).

See Regulations section 1.882-4 for details.

Private Delivery Services

Corporations may use certain private delivery services designated by the IRS to meet the “timely mailing as timely filing/paying” rule for tax returns and payments. These private delivery services include only the following.

  • DHL Express (DHL): DHL Same Day Service, DHL Next Day 10:30 am, DHL Next Day 12:00 pm, DHL Next Day 3:00 pm, and DHL 2nd Day Service.

  • Federal Express (FedEx): FedEx Priority Overnight, FedEx Standard Overnight, FedEx 2Day, FedEx International Priority, and FedEx International First.

  • United Parcel Service (UPS): UPS Next Day Air, UPS Next Day Air Saver, UPS 2nd Day Air, UPS 2nd Day Air A.M., UPS Worldwide Express Plus, and UPS Worldwide Express.

The private delivery service can tell you how to get written proof of the mailing date.

Caution
Private delivery services cannot deliver items to P.O. boxes. You must use the U.S. Postal Service to mail any item to an IRS P.O. box address.

Where To File

File Form 1120-F with the Internal Revenue Service Center, P.O. Box 409101, Ogden, UT 84409.

Who Must Sign

The return must be signed and dated by:

  • The president, vice president, treasurer, assistant treasurer, chief accounting officer or

  • Any other corporate officer (such as tax officer) authorized to sign.

If a return is filed on behalf of a corporation by a receiver, trustee, or assignee, the fiduciary must sign the return, instead of the corporate officer. Returns and forms signed by a receiver or trustee in bankruptcy on behalf of a corporation must be accompanied by a copy of the order or instructions of the court authorizing signing of the return or form.

If an employee of the corporation completes Form 1120-F, the paid preparer's space should remain blank. Anyone who prepares Form 1120-F but does not charge the corporation should not complete that section. Generally, anyone who is paid to prepare the return must sign it and fill in the “Paid Preparer's Use Only” area.

The paid preparer must complete the required preparer information and—

  • Sign the return in the space provided for the preparer's signature.

  • Give a copy of the return to the taxpayer.

Note.

A paid preparer may sign original or amended returns by rubber stamp, mechanical device, or computer software program.

Paid Preparer Authorization

If the corporation wants to allow the IRS to discuss its 2006 tax return with the paid preparer who signed it, check the “Yes” box in the signature area of the return. This authorization applies only to the individual whose signature appears in the “Paid Preparer's Use Only” section of the return. It does not apply to the firm, if any, shown in that section.

If the “Yes” box is checked, the corporation is authorizing the IRS to call the paid preparer to answer any questions that may arise during the processing of its return. The corporation is also authorizing the paid preparer to:

  • Give the IRS any information that is missing from the return,

  • Call the IRS for information about the processing of the return or the status of any related refund or payment(s), and

  • Respond to certain IRS notices about math errors, offsets, and return preparation.

The corporation is not authorizing the paid preparer to receive any refund check, bind the corporation to anything (including any additional tax liability), or otherwise represent the corporation before the IRS.

The authorization will automatically end no later than the due date (excluding extensions) for filing the corporation's 2007 tax return. If the corporation wants to expand the paid preparer's authorization or revoke the authorization before it ends, see Pub. 947, Practice Before the IRS and Power of Attorney.

Other Forms and Statements That May Be Required

Forms

A foreign corporation may have to file some of the following forms. See the form for more information.

For a list of additional forms the corporation may need to file (most notably, forms pertaining to the reporting of various types of income, and any related withholding, to U.S. persons, foreign persons, and the IRS), see Pub. 542, Corporations.

Form 5472,   Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business. This form is filed by or for a foreign corporation engaged in a U.S. trade or business that had certain reportable transactions with a related party. See Form 5472 for filing instructions and information for failure to file and maintain records.

Form 8264,   Application for Registration of a Tax Shelter. Until further guidance is issued, material advisors who provide material aid, assistance, or advice with respect to any reportable transaction, must use Form 8264 to disclose reportable transactions in accordance with interim guidance provided in Notice 2004-80, 2004-50 I.R.B. 963; Notice 2005-17, 2005-8 I.R.B. 606; and Notice 2005-22, 2005-12 I.R.B. 756.

Form 8275,   Disclosure Statement, and Form 8275-R, Regulation Disclosure Statement. Disclose items or positions taken on a tax return that are not otherwise adequately disclosed on a tax return or that are contrary to Treasury regulations (to avoid parts of the accuracy-related penalty or certain preparer penalties).

Form 8300,   Report of Cash Payments Over $10,000 Received in a Trade or Business. Use this form to report the receipt of more than $10,000 in cash or foreign currency in one transaction or a series of related transactions.

Form 8302,   Electronic Deposit of Tax Refund of $1 Million or More. The form must be filed to request an electronic deposit of a tax refund of $1 million or more.

Form 8833,   Treaty-Based Return Position Disclosure Under Section 6114 or 7701(b). Use this form to make the treaty-based return position disclosure required by section 6114.

Form 8886,   Reportable Transaction Disclosure Statement. Use this form to disclose information for each reportable transaction in which the corporation participated. Form 8886 must be filed for each tax year that the federal income tax liability of the corporation is affected by its participation in the transaction. The corporation may have to pay a penalty if it is required to file Form 8886 and does not do so. The following are reportable transactions:

  1. Any listed transaction, which is a transaction that is the same as or substantially similar to tax avoidance transactions identified by the IRS.

  2. Any transaction offered under conditions of confidentiality for which the corporation paid an advisor a fee of at least $250,000.

  3. Certain transactions for which the corporation has contractual protection against disallowance of the tax benefits.

  4. Certain transactions resulting in a loss of at least $10 million in any single year or $20 million in any combination of years.

  5. Certain transactions resulting in a tax credit of more than $250,000, if the corporation held the asset generating the credit for 45 days or less.

Penalties.    The corporation may have to pay a penalty if it is required to disclose a reportable transaction under section 6011 and fails to properly complete and file Form 8886. The penalty is $50,000 ($200,000 if the reportable transaction is a listed transaction) for each failure to file Form 8886 with its corporate return or for failure to provide a copy of Form 8886 to the Office of Tax Shelter Analysis (OTSA). Other penalties, such as an accuracy-related penalty under section 6662A, may also apply. See the Instructions for Form 8886 for details.

Statements

Transfers to a corporation controlled by the transferor.   If a person receives stock of a corporation in exchange for property and no gain or loss is recognized under section 351, the person (transferor) and the transferee must each attach to their tax returns the statements required by Temporary Regulations section 1.351-3T.

Election to reduce basis under section 362(e)(2)(C).   The transferor and transferee in certain section 351 transactions may make a joint election under section 362(e)(2)(C) to limit the transferor's basis in the stock received instead of the transferee's basis in the transferred property. The transferor and transferee may make the election by attaching the statement as provided in Notice 2005-70, 2005-41 I.R.B. 694, to their tax returns filed by the due date (including extensions) for the tax year in which the transaction occurred. Once made, the election is irrevocable. See section 362(e)(2)(C) and Notice 2005-70.

Foreign corporation with no gross income.   If the foreign corporation has no gross income for the tax year, do not complete the Form 1120-F schedules. Instead, attach a statement to the return showing the types and amounts of income excluded from gross income.

Assembling the Return

To ensure that the corporation's tax return is correctly processed, attach all schedules and other forms after page 6, Form 1120-F, and in the following order:

  1. Schedule O (Form 1120).

  2. Form 4626.

  3. Form 8302.

  4. Form 4136.

  5. Additional schedules in alphabetical order.

  6. Additional forms in numerical order.

Complete every applicable entry space on Form 1120-F. Do not enter “See Attached” instead of completing the entry spaces. If more space is needed on the forms or schedules, attach separate sheets using the same size and format as the printed forms. If there are supporting statements and attachments, arrange them in the same order as the schedules or forms they support and attach them last. Show the totals on the printed forms. Enter the corporation's name and EIN on each supporting statement or attachment.

Accounting Methods

Figure taxable income using the method of accounting regularly used in keeping the corporation's books and records. In all cases, the method used must clearly show taxable income. Permissible methods include cash, accrual, or any other method authorized by the Internal Revenue Code.

Generally, the following rules apply.

  • A corporation (other than a qualified personal service corporation) must use the accrual method of accounting if its average annual gross receipts exceed $5 million.

  • Unless it is a qualifying taxpayer or a qualifying small business taxpayer, a corporation must use the accrual method for sales and purchases of inventory items. See Cost of Goods Sold on page 17.

  • A corporation engaged in farming must use the accrual method. For exceptions, see section 447.

  • Special rules apply to long-term contracts. See section 460.

  • Dealers in securities must use the mark-to-market accounting method. Dealers in commodities and traders in securities and commodities may elect to use the mark-to-market accounting method. See section 475.

Change in accounting method.   To change its method of accounting used to report taxable income (for income as a whole or for the treatment of any material item), the corporation must file Form 3115, Application for Change in Accounting Method.

  See Form 3115 and Pub. 538, Accounting Periods and Methods, for more information on accounting methods.

Accounting Periods

A corporation must figure its taxable income on the basis of a tax year. A tax year is the annual accounting period a corporation uses to keep its records and report its income and expenses. Generally, corporations may use a calendar year or a fiscal year. Personal service corporations, however, must generally use a calendar year unless they meet one of the exceptions discussed under Accounting period on page 9. Furthermore, special rules apply to specified foreign corporations. See Specified Foreign Corporations below.

Change of tax year.   Generally, a corporation, including a personal service corporation, must get the consent of the IRS before changing its tax year by filing Form 1128, Application To Adopt, Change, or Retain a Tax Year. However, under certain conditions, a corporation may change its tax year without getting the consent.

  See Form 1128 and Pub. 538 for more information on accounting periods and tax years.

Specified Foreign Corporations

The annual accounting period of a specified foreign corporation (defined below) is generally required to be the tax year of its majority U.S. shareholder. If there is more than one majority shareholder, the required tax year will be the tax year that results in the least aggregate deferral of income to all U.S. shareholders of the foreign corporation. For more information, see section 898 and Rev. Procs. 2002-37, 2002-22 I.R.B. 1030, and 2002-39, 2002-22 I.R.B. 1046, as modified by Notice 2002-72, 2002-46 I.R.B. 843.

Specified foreign corporation.   A specified foreign corporation is any foreign corporation that is treated as a controlled foreign corporation (CFC) under subpart F (sections 951 through 964) and with respect to which more than 50% of the total voting power or value of all classes of stock of the corporation is treated as owned by a U.S. shareholder.

Rounding Off to Whole Dollars

The corporation may round off cents to whole dollars on its return and schedules. If the corporation does round to whole dollars, it must round all amounts. To round, drop amounts under 50 cents and increase amounts from 50 to 99 cents to the next dollar. For example, $1.39 becomes $1 and $2.50 becomes $3.

If two or more amounts must be added to figure the amount to enter on a line, include cents when adding the amounts and round off only the total.

Recordkeeping

Keep the corporation's records for as long as they may be needed for the administration of any provision of the Internal Revenue Code. Usually, records that support an item of income, deduction, or credit on the return must be kept for 3 years from the date the return is due or filed, whichever is later. Keep records that verify the corporation's basis in property for as long as they are needed to figure the basis of the original or replacement property.

The corporation should keep copies of all filed returns. They help in preparing future and amended returns.

Payment of Tax Due

The requirements for payment of tax depend on whether the foreign corporation has an office or place of business in the United States.

Foreign corporations that do not maintain an office or place of business in the United States must pay any tax due (page 1, line 7) in full no later than the 15th day of the 6th month after the end of the tax year.

The tax must be paid directly to the IRS (i.e., do not use either of the depository methods of tax payment described below). The tax may be paid by check or money order, payable to the United States Treasury. To help ensure proper crediting, write the corporation's employer identification number (EIN), “Form 1120-F,” and the tax period to which the payment applies on the check or money order. Enclose the payment when the corporation files Form 1120-F.

Foreign corporations that do maintain an office or place of business in the United States must pay any tax due (page 1, line 7) in full no later than the 15th day of the 3rd month after the end of the tax year. The tax must be paid using one of the depository methods of tax payment described below.

Depository Methods of Tax Payment

The two methods of depositing taxes are discussed below.

Electronic Deposit Requirement

The corporation must make electronic deposits of all depository taxes (such as employment tax, excise tax, and corporate income tax) using the Electronic Federal Tax Payment System (EFTPS) in 2007 if:

  • The total deposits of such taxes in 2005 were more than $200,000 or

  • The corporation was required to use EFTPS in 2006.

If the corporation is required to use EFTPS and fails to do so, it may be subject to a 10% penalty. If the corporation is not required to use EFTPS, it may participate voluntarily. To enroll in or get more information about EFTPS, call 1-800-555-4477. To enroll online, visit www.eftps.gov.

Depositing on time.   For EFTPS deposits to be made timely, the corporation must initiate the transaction at least 1 business day before the date the deposit is due.

Deposits With Form 8109

If the corporation does not use EFTPS, deposit corporation income tax payments (and estimated tax payments) with Form 8109, Federal Tax Deposit Coupon. If you do not have a preprinted Form 8109, use Form 8109-B to make deposits. You can get this form by calling 1-800-829-4933 or visiting an IRS assistance center. Have your EIN ready when you call.

Do not send deposits directly to an IRS office; otherwise, the corporation may have to pay a penalty. Mail or deliver the completed Form 8109 with the payment to an authorized depositary (i.e., a commercial bank or other financial institution authorized to accept federal tax deposits). Make checks or money orders payable to the depositary.

If the corporation prefers, it may mail the coupon and payment to: Financial Agent, Federal Tax Deposit Processing, P.O. Box 970030, St. Louis, MO 63197. Make the check or money order payable to “Financial Agent.”

To help ensure proper crediting, write the corporation's EIN, the tax period to which the deposit applies, and “Form 1120-F” on the check or money order. Darken the “1120” box under “Type of Tax” and the appropriate “Quarter” box under “Tax Period” on the coupon. Records of these deposits will be sent to the IRS.

For more information on deposits, see the instructions in the coupon booklet (Form 8109) and Pub. 583, Starting a Business and Keeping Records.

Caution
If the corporation owes tax when it files Form 1120-F, do not include the payment with Form 1120-F. Instead, mail or deliver the payment with Form 8109 to an authorized depositary or use EFTPS, if applicable.

Estimated Tax Payments

Generally, the following rules apply to a foreign corporation's payments of estimated tax.

  • The corporation must make installment payments of estimated tax if it expects its total tax for the year (less applicable credits) to be $500 or more.

  • The installments are due by the 15th day of the 4th, 6th, 9th, and 12th months of the tax year. If any date falls on a Saturday, Sunday, or legal holiday, the installment is due on the next regular business day.

  • Use Form 1120-W, Estimated Tax for Corporations, as a worksheet to compute estimated tax.

  • If the foreign corporation maintains an office or place of business in the United States and does not use EFTPS, use the deposit coupons (Forms 8109) to make deposits of estimated tax.

  • If the foreign corporation does not maintain an office or place of business in the United States, it must pay the estimated tax due directly to the IRS.

  • If the corporation overpaid estimated tax, it may be able to get a quick refund by filing Form 4466, Corporation Application for Quick Refund of Overpayment of Estimated Tax.

See the instructions for lines 5b and 5c.

Estimated tax penalty.   A corporation that does not make estimated tax payments when due may be subject to an underpayment penalty for the period of underpayment. Generally, a corporation is subject to the penalty if its tax liability is $500 or more and it did not timely pay the smaller of:

  • Its tax liability for 2006 or

  • Its prior year's tax.

  See section 6655 for details and exceptions, including special rules for large corporations. Also, no estimated tax payments are required with respect to a foreign corporation's liability for the branch profits tax. See Regulations section 1.884-1(a).

  Use Form 2220, Underpayment of Estimated Tax by Corporations, to see if the corporation owes a penalty and to figure the amount of the penalty. Generally, the corporation does not have to file this form because the IRS can figure the amount of any penalty and bill the corporation for it. However, even if the corporation does not owe the penalty, complete and attach Form 2220 if:

  • The annualized income or adjusted seasonal installment method is used or

  • The corporation is a large corporation computing its first required installment based on the prior year's tax. See the Instructions for Form 2220 for the definition of a large corporation. Also, see the instructions for line 6.

Interest and Penalties

Interest.   Interest is charged on taxes paid late even if an extension of time to file is granted. Interest is also charged on penalties imposed for failure to file, negligence, fraud, substantial valuation misstatements, substantial understatements of tax, and reportable transaction understatements from the due date (including extensions) to the date of payment. The interest charge is figured at a rate determined under section 6621.

Penalty for late filing of return.   A corporation that does not file its tax return by the due date, including extensions, may be penalized 5% of the unpaid tax for each month or part of a month the return is late, up to a maximum of 25% of the unpaid tax. The minimum penalty for a return that is over 60 days late is the smaller of the tax due or $100. The penalty will not be imposed if the corporation can show that the failure to file on time was due to reasonable cause. Corporations that file late should attach a statement explaining the reasonable cause.

Penalty for late payment of tax.   A corporation that does not pay the tax when due generally may be penalized ½ of 1% of the unpaid tax for each month or part of a month the tax is not paid, up to a maximum of 25% of the unpaid tax. The penalty will not be imposed if the corporation can show that the failure to pay on time was due to reasonable cause.

Trust fund recovery penalty.   This penalty may apply if certain excise, income, social security, and Medicare taxes that must be collected or withheld are not collected or withheld, or these taxes are not paid. These taxes are generally reported on:

  • Form 720, Quarterly Federal Excise Tax Return;

  • Form 941, Employer's Quarterly Federal Tax Return;

  • Form 943, Employer's Annual Federal Tax Return for Agricultural Employees; or

  • Form 945, Annual Return of Withheld Federal Income Tax.

   The trust fund recovery penalty may be imposed on all persons who are determined by the IRS to have been responsible for collecting, accounting for, and paying over these taxes, and who acted willfully in not doing so. The penalty is equal to the unpaid trust fund tax. See the instructions for Form 720; Pub. 15 (Circular E), Employer's Tax Guide; or Pub. 51 (Circular A), Agricultural Employer's Tax Guide, for details, including the definition of responsible persons.

Other penalties.   Other penalties may be imposed for negligence, substantial understatement of tax, reportable transaction understatements, and fraud. See sections 6662, 6662A, and 6663.

Special Rules for Foreign Corporations

Source of Income Rules

The source of income is important in determining the extent to which income is taxable to foreign corporations. Each type of income has its own sourcing rules.

Interest Income

The source of interest income is usually determined by the residence of the obligor.

For example, interest paid by an obligor who is a resident of the United States is U.S. source income, and interest paid by an obligor who is a resident of a country other than the United States is foreign source income.

Exceptions.   The following types of interest income are treated as foreign source income:

  • Interest income received from foreign branches of U.S. banks and savings and loan associations and

  • Interest income received from a U.S. corporation or a resident alien individual, if 80% or more of the U.S. corporation's (or resident alien individual's) gross income is active foreign business income during the testing period.

  • In the case of a foreign partnership that is predominantly engaged in the active conduct of a trade or business outside the United States, interest income received from that partnership that is not paid by a U.S. trade or business engaged in by the partnership and not allocable to income that is effectively connected (or treated as effectively connected) with the conduct of a U.S. trade or business.

    Active foreign business income is income from sources outside the United States attributable to the active conduct of a trade or business in a foreign country or U.S. possession.

    The testing period is generally the 3 tax years of the U.S. corporation or resident alien individual preceding the tax year during which the interest is paid. If the payer existed for fewer than 3 years before the tax year of the payment, the testing period is the term of the payer's existence before the current year. If the payment is made during the payer's first tax year, that year is the testing period.

Additional exception.   For a foreign corporation engaged in a U.S. trade or business, interest paid by the U.S. trade or business is treated as if paid by a domestic corporation. As such, this interest is treated as U.S. source interest income by the recipient (in the context of this instruction, the foreign corporation filing this Form 1120-F) even though the actual payer of the interest is a foreign corporation. For details (but from the perspective of the foreign corporation paying the interest), see Part II—Tax on Excess Interest on page 21.

Look-thru rule.   If the foreign corporation is a related person to a U.S. corporation or resident alien individual that meets the 80% rule described above, the foreign corporation will have foreign source income only when the income of the payer was from foreign sources. See section 861(c)(2) for more information.

Dividend Income

The source of dividend income is usually determined by the payer. For example, dividends paid by a corporation that was incorporated in the United States are U.S. source income and dividends paid by a corporation that was incorporated in a foreign country are foreign source income.

Exceptions:   

  • Dividends paid by a U.S. corporation are foreign source income:

    1. If the U.S. corporation has made a valid election under section 936 (or section 30A), relating to certain U.S. corporations operating in a U.S. possession or

    2. To the extent the dividends are from qualified export receipts described in section 993(a)(1) (other than interest and gains described in section 995(b)(1)).

  • Dividends paid by a foreign corporation are U.S. source income:

    1. If the dividend is treated under section 243(e) as a distribution from the accumulated profits of a predecessor U.S. corporation or

    2. To the extent the foreign corporation's effectively connected gross income for the testing period (defined below) bears to all of the foreign corporation's gross income for the testing period, but only if 25% or more of the foreign corporation's gross income during the testing period was effectively connected with the conduct of a U.S. trade or business.

  The testing period is generally the 3 tax years of the foreign corporation payer preceding the tax year during which it declared the dividend. If the foreign corporation existed for fewer than 3 years before the tax year of declaration, the testing period is the term of the foreign corporation's existence before the current year. If the foreign corporation declared the dividend in its first tax year, that year is the testing period. Regardless of source, however, there is no tax imposed on any dividends paid by a foreign corporation out of earnings and profits for a tax year in which the foreign corporation was subject to the branch profits tax (determined after application of any income tax treaty).

Rent and Royalty Income

The source of rent and royalty income for the use of property is determined based on where the property is located.

Income From the Sale or Exchange of Real Estate

The source of this income is determined based on where the property is located.

Income From the Sale or Exchange of Personal Property

Income from the sale of personal property by a foreign corporation is sourced as follows:

  • Income from the purchase and sale of inventory property is generally sourced under sections 861(a)(6) as U.S. source and under section 862(a)(6) as foreign source.

  • Income from the production and sale of inventory property is generally sourced under section 863(b)(2).

  • Income from the sale of depreciable property is generally sourced under section 865(c).

  • Income from the sale of intangibles is generally sourced under section 865(d).

Foreign corporations with an office or fixed place of business in the United States.   Income from the sale of personal property attributable to such office or fixed place of business is U.S. source income regardless of any of the above rules relating to the source of income from the sale or exchange of personal property unless the foreign corporation is an export trade corporation (see sections 865(e)(2)(A) and 971).

Exception.   Income from the sale of inventory property is foreign source income if the goods were sold for use, disposition, or consumption outside the United States and a foreign office of the corporation materially participated in the sale.

Other Special Rules

Basis of Property and Inventory Costs for Property Imported by a Related Person

If property is imported into the United States by a related person in a transaction and the property has a customs value, the basis or inventory cost to the importer may not exceed the customs value. See section 1059A.

Income of Foreign Governments and International Organizations

Income of foreign governments and international organizations from the following sources is generally not subject to tax or withholding:

  • Investments in the United States in stocks, bonds, or other domestic securities owned by such foreign government or international organization;

  • Interest on deposits in banks in the United States of money belonging to such foreign government or international organization; and

  • Investments in the United States in financial instruments held (by a foreign government) in executing governmental financial or monetary policy.

Exception.   The income described in section 892(a)(2) that is received directly or indirectly from commercial activities is subject to both tax and withholding.

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