republic-os/legal/us/code/title-26/chapter-1/section-986.md

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LegalText	26 U.S.C. § 986	Determination of foreign taxes and foreign corporation’s earnings and profits	us	united_states_code	code_section	26	INTERNAL REVENUE CODE	1	NORMAL TAXES AND SURTAXES	986	26 U.S.C. § 986	current	119-100	2026-06-26	official	https://uscode.house.gov/download/releasepoints/us/pl/119/100/xml_usc26@119-100.zip	/us/usc/t26/s986	data/legal/raw/us/code/title-26/usc26.xml	f0fe94e5f982393a378198ed1ba7ebad21044ccb6d60799bacb395bc23e56721	a261f094809116f42a96648a3d5eee80fa010379d67412551c21dd5c900b27f4	04ea3de029e9508961acd799cd2fe8cd73e9c7cad358eb397235a0c58c07f2ab	2026-07-04	official	legal us-code

26 U.S.C. § 986 - Determination of foreign taxes and foreign corporation’s earnings and profits

Text

(a) Foreign income taxes (1) Translation of accrued taxes (A) In general 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.

(B) Exception for certain taxes Subparagraph (A) shall not apply to any foreign income taxes—

(i) paid after the date 2 years after the close of the taxable year to which such taxes relate, or

(ii) paid before the beginning of the taxable year to which such taxes relate.

(C) Exception for inflationary currencies Subparagraph (A) shall not apply to any foreign income taxes the liability for which is denominated in any inflationary currency (as determined under regulations).

(D) Elective exception for taxes paid other than in functional currency (i) In general 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.

(ii) Application to qualified business units 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.

(iii) Election 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.

(E) Special rule for regulated investment companies 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.

(F) Cross reference For adjustments where tax is not paid within 2 years, see section 905(c).

(2) Translation of taxes to which paragraph (1) does not apply For purposes of determining the amount of the foreign tax credit, in the case of any foreign income taxes to which subparagraph (A) or (E) of paragraph (1) does not apply—

(A) such 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 such 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 the original payment of such foreign income taxes.

(3) Authority to permit use of average rates 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.

(4) Foreign income taxes 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.

(b) Earnings and profits and distributions For purposes of determining the tax under this subtitle—

(1) of any shareholder of any foreign corporation, the earnings and profits of such corporation shall be determined in the corporation’s functional currency, and

(2) in the case of any United States person, the earnings and profits determined under paragraph (1) (when distributed, deemed distributed, or otherwise taken into account under this subtitle) shall (if necessary) be translated into dollars using the appropriate exchange rate.

(c) Previously taxed earnings and profits (1) In general 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.

(2) Distributions through tiers 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.)

Notes

Editorial Notes

Amendments2004—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 AmendmentPub. 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 AmendmentPub. 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 AmendmentAmendment 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 DateSection 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.