Title 26 — Internal Revenue CodeRelease 119-73
§956 Investment of earnings in United States property
Title 26 › Subtitle Subtitle A— - Income Taxes › Chapter CHAPTER 1— - NORMAL TAXES AND SURTAXES › Subchapter Subchapter N— - Tax Based on Income From Sources Within or Without the United States › Part PART III— - INCOME FROM SOURCES WITHOUT THE UNITED STATES › Subpart Subpart F— - Controlled Foreign Corporations › § 956
Summary
A United States shareholder of a controlled foreign corporation must count an amount that measures how much of the company’s earnings are effectively invested in U.S. property. That amount is the smaller of two numbers: (1) the shareholder’s share of the average value of the corporation’s U.S. property during the year minus the shareholder’s previously taxed earnings of that company, or (2) the shareholder’s share of the corporation’s “applicable earnings.” “Applicable earnings” means prior years’ accumulated positive earnings plus current-year earnings. Property bought before the company first became a controlled foreign corporation is ignored, up to the amount of earnings accumulated before that date. If the company stops being a controlled foreign corporation partway through the year, the shareholder’s share, the quarterly averages, and the earnings are figured only for the part of the year when it was a controlled foreign corporation. “United States property” is property bought after December 31, 1962, and includes things like tangible property in the United States, stock of U.S. corporations, debts owed by U.S. persons, and rights to use certain intellectual property in the United States. But many items are not treated as U.S. property, for example U.S. government obligations, bank deposits, property bought in the U.S. for export, certain trade-related debts of ordinary size, transportation equipment used mainly outside the U.S., some insurance reserves, certain domestic stock or debt depending on ownership percentages (including a more-than-80% and a 25% ownership rule), offshore resource equipment, earnings already excluded under other rules, certain dealer collateral and short-term dealer securities, and some obligations to U.S. persons that meet listed ownership tests. Trade or service receivables bought from a related U.S. person, when the payer is a U.S. person, are included as U.S. property. A controlled foreign corporation that guarantees or pledges a U.S. person’s debt is treated as holding that U.S. obligation. The Treasury Secretary will write rules to apply these points and to stop efforts to avoid them.
Full Legal Text
Title 26, §956
Internal Revenue Code — Source: USLM XML via OLRC
(a)In the case of any controlled foreign corporation, the amount determined under this section with respect to any United States shareholder for any taxable year is the lesser of—
(1)the excess (if any) of—
(A)such shareholder’s pro rata share of the average of the amounts of United States property held (directly or indirectly) by the controlled foreign corporation as of the close of each quarter of such taxable year, over
(B)the amount of earnings and profits described in section 959(c)(1)(A) with respect to such shareholder, or
(2)such shareholder’s pro rata share of the applicable earnings of such controlled foreign corporation.
(b)(1)For purposes of this section, the term “applicable earnings” means, with respect to any controlled foreign corporation, the sum of—
(A)the amount (not including a deficit) referred to in section 316(a)(1) to the extent such amount was accumulated in prior taxable years, and
(B)the amount referred to in section 316(a)(2),
(2)In applying subsection (a) to any taxable year, there shall be disregarded any item of United States property which was acquired by the controlled foreign corporation before the first day on which such corporation was treated as a controlled foreign corporation. The aggregate amount of property disregarded under the preceding sentence shall not exceed the portion of the applicable earnings of such controlled foreign corporation which were accumulated during periods before such first day.
(3)If any foreign corporation ceases to be a controlled foreign corporation during any taxable year—
(A)the determination of any United States shareholder’s pro rata share shall be made on the basis of stock owned (within the meaning of section 958(a)) by such shareholder on the last day during the taxable year on which the foreign corporation is a controlled foreign corporation,
(B)the average referred to in subsection (a)(1)(A) for such taxable year shall be determined by only taking into account quarters ending on or before such last day, and
(C)in determining applicable earnings, the amount taken into account by reason of being described in paragraph (2) of section 316(a) shall be the portion of the amount so described which is allocable (on a pro rata basis) to the part of such year during which the corporation is a controlled foreign corporation.
(c)(1)For purposes of subsection (a), the term “United States property” means any property acquired after December 31, 1962, which is—
(A)tangible property located in the United States;
(B)stock of a domestic corporation;
(C)an obligation of a United States person; or
(D)any right to the use in the United States of—
(i)a patent or copyright,
(ii)an invention, model, or design (whether or not patented),
(iii)a secret formula or process, or
(iv)any other similar right,
(2)For purposes of subsection (a), the term “United States property” does not include—
(A)obligations of the United States, money, or deposits with—
(i)any bank (as defined by section 2(c) of the Bank Holding Company Act of 1956 (12 U.S.C. 1841(c)), without regard to subparagraphs (C) and (G) of paragraph (2) of such section), or
(ii)any corporation not described in clause (i) with respect to which a bank holding company (as defined by section 2(a) of such Act) or financial holding company (as defined by section 2(p) of such Act) owns directly or indirectly more than 80 percent by vote or value of the stock of such corporation;
(B)property located in the United States which is purchased in the United States for export to, or use in, foreign countries;
(C)any obligation of a United States person arising in connection with the sale or processing of property if the amount of such obligation outstanding at no time during the taxable year exceeds the amount which would be ordinary and necessary to carry on the trade or business of both the other party to the sale or processing transaction and the United States person had the sale or processing transaction been made between unrelated persons;
(D)any aircraft, railroad rolling stock, vessel, motor vehicle, or container used in the transportation of persons or property in foreign commerce and used predominantly outside the United States;
(E)an amount of assets of an insurance company equivalent to the unearned premiums or reserves ordinary and necessary for the proper conduct of its insurance business attributable to contracts which are contracts described in section 953(e)(2);
(F)the stock or obligations of a domestic corporation which is neither a United States shareholder (as defined in section 951(b)) of the controlled foreign corporation, nor a domestic corporation, 25 percent or more of the total combined voting power of which, immediately after the acquisition of any stock in such domestic corporation by the controlled foreign corporation, is owned, or is considered as being owned, by such United States shareholders in the aggregate;
(G)any movable property (other than a vessel or aircraft) which is used for the purpose of exploring for, developing, removing, or transporting resources from ocean waters or under such waters when used on the Continental Shelf of the United States;
(H)an amount of assets of the controlled foreign corporation equal to the earnings and profits accumulated after December 31, 1962, and excluded from subpart F income under section 952(b);
(I)deposits of cash or securities made or received on commercial terms in the ordinary course of a United States or foreign person’s business as a dealer in securities or in commodities, but only to the extent such deposits are made or received as collateral or margin for (i) a securities loan, notional principal contract, options contract, forward contract, or futures contract, or (ii) any other financial transaction in which the Secretary determines that it is customary to post collateral or margin;
(J)an obligation of a United States person to the extent the principal amount of the obligation does not exceed the fair market value of readily marketable securities sold or purchased pursuant to a sale and repurchase agreement or otherwise posted or received as collateral for the obligation in the ordinary course of its business by a United States or foreign person which is a dealer in securities or commodities;
(K)securities acquired and held by a controlled foreign corporation in the ordinary course of its business as a dealer in securities if—
(i)the dealer accounts for the securities as securities held primarily for sale to customers in the ordinary course of business, and
(ii)the dealer disposes of the securities (or such securities mature while held by the dealer) within a period consistent with the holding of securities for sale to customers in the ordinary course of business; and
(L)an obligation of a United States person which—
(i)is not a domestic corporation, and
(ii)is not—
(I)a United States shareholder (as defined in section 951(b)) of the controlled foreign corporation, or
(II)a partnership, estate, or trust in which the controlled foreign corporation, or any related person (as defined in section 954(d)(3)), is a partner, beneficiary, or trustee immediately after the acquisition of any obligation of such partnership, estate, or trust by the controlled foreign corporation.
(3)(A)Notwithstanding paragraph (2) (other than subparagraph (H) thereof), the term “United States property” includes any trade or service receivable if—
(i)such trade or service receivable is acquired (directly or indirectly) from a related person who is a United States person, and
(ii)the obligor under such receivable is a United States person.
(B)For purposes of this paragraph, the term “trade or service receivable” and “related person” have the respective meanings given to such terms by section 864(d).
(d)For purposes of subsection (a), a controlled foreign corporation shall, under regulations prescribed by the Secretary, be considered as holding an obligation of a United States person if such controlled foreign corporation is a pledgor or guarantor of such obligations.
(e)The Secretary shall prescribe such regulations as may be necessary to carry out the purposes of this section, including regulations to prevent the avoidance of the provisions of this section through reorganizations or otherwise.
Legislative History
Notes & Related Subsidiaries
Editorial Notes
Amendments
2018—Subsec. (c)(2)(E). Pub. L. 115–141, § 401(a)(162), substituted “which are contracts described in section 953(e)(2)” for “which are not contracts described in section 953(a)(1)”. Subsec. (e). Pub. L. 115–141, § 401(a)(163), substituted “provisions” for “provisons”. 2007—Subsec. (c)(2). Pub. L. 110–172, § 11(g)(15)(A)(ii), substituted “subparagraphs (I), (J), and (K)” for “subparagraphs (J), (K), and (L)” in concluding provisions. Subsec. (c)(2)(I) to (M). Pub. L. 110–172, § 11(g)(15)(A)(i), redesignated subpars. (J) to (M) as (I) to (L), respectively, and struck out former subpar. (I) which read as follows: “to the extent provided in
Regulations
prescribed by the Secretary, property which is otherwise United States property which is held by a FSC and which is related to the export activities of such FSC;”. 2004—Subsec. (c)(2). Pub. L. 108–357, § 407(b), substituted “, (K), and (L)” for “and (K)” in concluding provisions. Subsec. (c)(2)(A). Pub. L. 108–357, § 837(a), amended subpar. (A) generally. Prior to amendment, subpar. (A) read as follows: “obligations of the United States, money, or deposits with persons carrying on the banking business;”. Subsec. (c)(2)(L), (M). Pub. L. 108–357, § 407(a), added subpars. (L) and (M). 1997—Subsec. (b)(1)(A). Pub. L. 105–34, § 1601(e), inserted “to the extent such amount was accumulated in prior taxable years” after “section 316(a)(1)”. Subsec. (c)(2). Pub. L. 105–34, § 1173(a), added subpars. (J) and (K) and concluding provisions. 1996—Subsec. (b)(1). Pub. L. 104–188, § 1501(b)(2), reenacted heading without change and amended text generally. Prior to amendment, text read as follows: “For purposes of this section, the term ‘applicable earnings’ has the meaning given to such term by section 956A(b), except that the provisions of such section excluding earnings and profits accumulated in taxable years beginning before October 1, 1993, shall be disregarded.” Subsec. (b)(3). Pub. L. 104–188, § 1501(b)(3), reenacted heading without change and amended text generally. Prior to amendment, text read as follows: “Rules similar to the rules of section 956A(e) shall apply for purposes of this section.” 1993—Subsec. (a). Pub. L. 103–66, § 13232(a)(2), added subsec. (a) and struck out former subsec. (a) which consisted of introductory provisions and pars. (1) to (3) setting out general rules for calculating amount of earnings of a controlled foreign corporation invested in United States and pro rata share of the increase for any taxable year in earnings of such a corporation invested in United States property. Subsecs. (b) to (d). Pub. L. 103–66, § 13232(a), added subsec. (b) and redesignated former subsecs. (b) and (c) as (c) and (d), respectively. Subsec. (e). Pub. L. 103–66, § 13232(b), added subsec. (e). 1986—Subsec. (b)(3)(A). Pub. L. 99–514 inserted “(other than subparagraph (H) thereof)”. 1984—Subsec. (b)(2)(I). Pub. L. 98–369, § 801(d)(8), added subpar. (I). Subsec. (b)(3). Pub. L. 98–369, § 123(b), added par. (3). 1976—Subsec. (b)(2)(F) to (H). Pub. L. 94–455, § 1021(a), added subpars. (F) and (G) and redesignated former subpar. (F) as (H). Subsec. (c). Pub. L. 94–455, § 1906(b)(13)(A), struck out “or his delegate” after “Secretary”.
Statutory Notes and Related Subsidiaries
Effective Date
of 2004 Amendment Pub. L. 108–357, title IV, § 407(c), Oct. 22, 2004, 118 Stat. 1499, provided that: “The
Amendments
made by this section [amending this section] shall apply to taxable years of foreign corporations beginning after December 31, 2004, and to taxable years of United States shareholders with or within which such taxable years of foreign corporations end.” Pub. L. 108–357, title VIII, § 837(b), Oct. 22, 2004, 118 Stat. 1596, provided that: “The amendment made by this section [amending this section] shall take effect on the date of the enactment of this Act [Oct. 22, 2004].”
Effective Date
of 1997 Amendment Pub. L. 105–34, title XI, § 1173(b), Aug. 5, 1997, 111 Stat. 989, provided that: “The
Amendments
made by this section [amending this section] shall apply to taxable years of foreign corporations beginning after December 31, 1997, and to taxable years of United States shareholders with or within which such taxable years of foreign corporations end.” Amendment by section 1601(e) of Pub. L. 105–34 effective as if included in the provisions of the Small Business Job Protection Act of 1996, Pub. L. 104–188, to which it relates, see section 1601(j) of Pub. L. 105–34, set out as a note under section 23 of this title.
Effective Date
of 1996 AmendmentAmendment by Pub. L. 104–188 applicable to taxable years of foreign corporations beginning after Dec. 31, 1996, and to taxable years of United States shareholders within which or with which such taxable years of foreign corporations end, see section 1501(d) of Pub. L. 104–188, set out as a note under section 904 of this title.
Effective Date
of 1993 AmendmentAmendment by Pub. L. 103–66 applicable to taxable years of controlled foreign corporations beginning after Sept. 30, 1993, and to taxable years of United States shareholders in which or with which such taxable years of controlled foreign corporations end, see section 13232(d) of Pub. L. 103–66, set out as a note under section 951 of this title.
Effective Date
of 1986 AmendmentAmendment by Pub. L. 99–514 effective, except as otherwise provided, as if included in the provisions of the Tax Reform Act of 1984, Pub. L. 98–369, div. A, to which such amendment relates, see section 1881 of Pub. L. 99–514, set out as a note under section 48 of this title.
Effective Date
of 1984 AmendmentAmendment by section 123(b) of Pub. L. 98–369 applicable to accounts receivable and evidences of indebtedness transferred after Mar. 1, 1984, in taxable years ending after such date, with an exception, see section 123(c) of Pub. L. 98–369, set out as a note under section 864 of this title. Amendment by section 801(d)(8) of Pub. L. 98–369 applicable to transactions after Dec. 31, 1984, in taxable years ending after such date, see section 805(a)(1) of Pub. L. 98–369, as amended, set out as a note under section 245 of this title.
Effective Date
of 1976 Amendment Pub. L. 94–455, title X, § 1021(c), Oct. 4, 1976, 90 Stat. 1619, as amended by Pub. L. 99–514, § 2, Oct. 22, 1986, 100 Stat. 2095, provided that: “The
Amendments
made by this section [amending this section and section 958 of this title] shall apply to taxable years of foreign corporations beginning after
December 31, 1975, and to taxable years of United States shareholders (within the meaning of section 951(b) of the Internal Revenue Code of 1986 [formerly I.R.C. 1954]) within which or with which such taxable years of such foreign corporations end. In determining for purposes of any taxable year referred to in the preceding sentence the amount referred to in section 956(a)(2)(A) of the Internal Revenue Code of 1986 for the last taxable year of a corporation beginning before
January 1, 1976, the
Amendments
made by this section shall be deemed also to apply to such last taxable year.” Plan
Amendments
Not Required Until January 1, 1989For provisions directing that if any
Amendments
made by subtitle A or subtitle C of title XI [§§ 1101–1147 and 1171–1177] or title XVIII [§§ 1800–1899A] of Pub. L. 99–514 require an amendment to any plan, such plan amendment shall not be required to be made before the first plan year beginning on or after Jan. 1, 1989, see section 1140 of Pub. L. 99–514, as amended, set out as a note under section 401 of this title.
Reference
Citations & Metadata
Citation
26 U.S.C. § 956
Title 26 — Internal Revenue Code
Last Updated
Apr 6, 2026
Release point: 119-73