Internal Revenue Code · 26 U.S.C.
§ 986. Determination of foreign taxes and foreign corporation’s earnings and profits
Official text, no changes From the Office of the Law Revision Counsel, release point 119-121 (current through Public Law 119-121 (October 9, 2026)). Compare it with the official text at uscode.house.gov (external site).
Cite as 26 U.S.C. § 986
At a glance
Read from the text, the source credit and the official notes. Not part of the law.
- Status
- In force
- Added
- October 22, 1986 by Pub. L. 99–514
- Last amended
- October 22, 2004 by Pub. L. 108–357
- Amendments
- 3 dated changes in the source credit
- Length
- 3 subsections · 772 words · about 3 min to read
- Defines
- 1 term
- Cross-references
- cites 2; cited by 5 Code sections and 16 other regulations
- Regulations
- 2 issued under this section
For purposes of determining the amount of the foreign tax credit, in the case of a taxpayer who takes foreign income taxes into account when accrued, the amount of any foreign income taxes (and any adjustment thereto) shall be translated into dollars by using the average exchange rate for the taxable year to which such taxes relate.
Subparagraph (A) shall not apply to any foreign income taxes the liability for which is denominated in any inflationary currency (as determined under regulations).
At the election of the taxpayer, subparagraph (A) shall not apply to any foreign income taxes the liability for which is denominated in any currency other than in the taxpayer’s functional currency.
An election under this subparagraph may apply to foreign income taxes attributable to a qualified business unit in accordance with regulations prescribed by the Secretary.
Any such election shall apply to the taxable year for which made and all subsequent taxable years unless revoked with the consent of the Secretary.
In the case of a regulated investment company which takes into account income on an accrual basis, subparagraphs (A) through (D) shall not apply and foreign income taxes paid or accrued with respect to such income shall be translated into dollars using the exchange rate as of the date the income accrues.
To the extent prescribed in regulations, the average exchange rate for the period (specified in such regulations) during which the taxes or adjustment is paid may be used instead of the exchange rate as of the time of such payment.
For purposes of this subsection, the term “foreign income taxes” means any income, war profits, or excess profits taxes paid or accrued to any foreign country or to any possession of the United States.
Foreign currency gain or loss with respect to distributions of previously taxed earnings and profits (as described in section 959 or 1293(c)) attributable to movements in exchange rates between the times of deemed and actual distribution shall be recognized and treated as ordinary income or loss from the same source as the associated income inclusion.
The Secretary shall prescribe regulations with respect to the treatment of distributions of previously taxed earnings and profits through tiers of foreign corporations.
(Added Pub. L. 99–514, title XII, § 1261(a), Oct. 22, 1986, 100 Stat. 2586; amended Pub. L. 100–647, title I, § 1012(v)(1)(A), Nov. 10, 1988, 102 Stat. 3528; Pub. L. 105–34, title XI, § 1102(a)(1), (b)(1), Aug. 5, 1997, 111 Stat. 963, 965; Pub. L. 108–357, title IV, § 408(a), (b), Oct. 22, 2004, 118 Stat. 1499.)
Terms defined here
Where the text says “the term … means”. Select a term to jump to its definition.
Regulations under this section
Treasury regulations (26 CFR) issued under § 986
Cross-references
Computed from the citations in the text of Title 26 and 26 CFR.
This section cites 2 other sections
Cited by 5 Code sections
- § 245(a)(4) Dividends received from certain foreign corporations
- § 245A(c)(2) Deduction for foreign source-portion of dividends received by domestic corporations from specified 10-percent owned foreign corporations
- § 905(c)(2)(B)(ii) Applicable rules
- § 909(c)(2) Suspension of taxes and credits until related income taken into account
- § 965(d)(3) Treatment of deferred foreign income upon transition to participation exemption system of taxation
Cited in 16 regulations not issued under it
- § 1.367(b)-2 Definitions and special rules.
- § 1.367(b)-3 Repatriation of foreign corporate assets in certain nonrecognition transactions.
- § 1.901-2 Income, war profits, or excess profits tax paid or accrued.
- § 1.904-4 Separate application of section 904 with respect to certain categories of income.
- § 1.905-3 Adjustments to U.S. tax liability and to current earnings and profits as a result of a foreign tax redetermination.
- § 1.905-4 Notification of foreign tax redetermination.
- § 1.960-1 Overview, definitions, and computational rules for determining foreign income taxes deemed paid under section 960(a), (b), and (d).
- § 1.960-3 Foreign income taxes deemed paid under section 960(b).
- § 1.964-1 Determination of the earnings and profits of a foreign corporation.
- § 1.965-1 Overview, general rules, and definitions.
- § 1.985-5 Adjustments required upon change in functional currency.
- § 1.985-7 Adjustments required in connection with a change to DASTM.
- § 1.987-3 Determination of section 987 taxable income or loss of an owner of a section 987 QBU.
- § 1.987-3T Determination of section 987 taxable income or loss of an owner of a section 987 QBU (temporary).
- § 1.987-4 Determination of net unrecognized section 987 gain or loss of a section 987 QBU.
- § 1.6038-2 Information returns required of United States persons with respect to annual accounting periods of certain foreign corporations.
Amendment history
From the source credit and the official notes, newest first.
Where it sits in the Code
- Subtitle A Income Taxes
- Chapter 1 NORMAL TAXES AND SURTAXES
- Subchapter N Tax Based on Income From Sources Within or Without the United States
- Part III INCOME FROM SOURCES WITHOUT THE UNITED STATES
- Subpart J Foreign Currency Transactions
Nearby sections
- § 985 Functional currency
- § 986 Determination of foreign taxes and foreign corporation’s earnings and profits
- § 987 Branch transactions
- § 988 Treatment of certain foreign currency transactions
- § 989 Other definitions and special rules
Official notes
Show the Law Revision Counsel's notes (amendments, effective dates)
Editorial Notes
Amendments
2004—Subsec. (a)(1)(D). Pub. L. 108–357, § 408(a), added subpar. (D). Former subpar. (D) redesignated (E).
Subsec. (a)(1)(E). Pub. L. 108–357, § 408(b)(1), added subpar. (E). Former subpar. (E) redesignated (F).
Pub. L. 108–357, § 408(a), redesignated subpar. (D) as (E).
Subsec. (a)(1)(F). Pub. L. 108–357, § 408(b)(1), redesignated subpar. (E) as (F).
Subsec. (a)(2). Pub. L. 108–357, § 408(b)(2), inserted “or (E)” after “subparagraph (A)” in introductory provisions.
1997—Subsec. (a). Pub. L. 105–34, § 1102(a)(1), amended subsec. (a) generally. Prior to amendment, subsec. (a) read as follows:
“(a) Foreign Taxes.—
“(1) In general.—For purposes of determining the amount of the foreign tax credit—
“(A) any foreign income taxes shall be translated into dollars using the exchange rates as of the time such taxes were paid to the foreign country or possession of the United States, and
“(B) any adjustment to the amount of foreign income taxes shall be translated into dollars using—
“(i) except as provided in clause (ii), the exchange rate as of the time when such adjustment is paid to the foreign country or possession, or
“(ii) in the case of any refund or credit of foreign income taxes, using the exchange rate as of the time of original payment of such foreign income taxes.
“(2) Foreign income taxes.—For purposes of paragraph (1), ‘foreign income taxes’ means any income, war profits, or excess profits taxes paid to any foreign country or to any possession of the United States.”
Subsec. (a)(3), (4). Pub. L. 105–34, § 1102(b)(1), added par. (3) and redesignated former par. (3) as (4).
1988—Pub. L. 100–647 substituted “foreign taxes and foreign corporation’s earnings and profits” for “foreign corporation’s earnings and profits and foreign taxes” in heading, and revised and restructured the provisions of subsecs. (a) and (b).
Statutory Notes and Related Subsidiaries
Effective Date of 2004 Amendment
Pub. L. 108–357, title IV, § 408(c), Oct. 22, 2004, 118 Stat. 1500, provided that: “The amendments made by this section [amending this section] shall apply to taxable years beginning after December 31, 2004.”
Effective Date of 1997 Amendment
Pub. L. 105–34, title XI, § 1102(c)(1), Aug. 5, 1997, 111 Stat. 966, provided that: “The amendments made by subsections (a)(1) and (b) [amending this section and section 989 of this title] shall apply to taxes paid or accrued in taxable years beginning after December 31, 1997.”
Effective Date of 1988 Amendment
Amendment by Pub. L. 100–647 effective, except as otherwise provided, as if included in the provision of the Tax Reform Act of 1986, Pub. L. 99–514, to which such amendment relates, see section 1019(a) of Pub. L. 100–647, set out as a note under section 1 of this title.
Effective Date
Section applicable to taxable years beginning after Dec. 31, 1986, with certain exceptions and qualifications, see section 1261(e) of Pub. L. 99–514, set out as a note under section 985 of this title.