Title 26, Internal Revenue CodeRelease 119-110
§1293 Current Taxation of Income From Qualified Electing Funds
Title 26 › Subtitle A — Income Taxes › CHAPTER 1 — NORMAL TAXES AND SURTAXES › Subchapter P — Capital Gains and Losses › PART VI — TREATMENT OF CERTAIN PASSIVE FOREIGN INVESTMENT COMPANIES › Subpart B — Treatment of Qualified Electing Funds › § 1293
Summary
If you are a U.S. person who owns stock in a qualified electing fund (a foreign investment company that agrees to these rules), you must report each year your share of the fund’s earnings. You report your part of the fund’s ordinary earnings as regular income and your part of the fund’s net capital gain as long-term capital gain. You include these amounts on the U.S. tax return for the year that matches the fund’s tax year. Your “pro rata” share means the portion you would have gotten if the fund had split its daily earnings among shareholders each day (the fund can use a shorter period if the Treasury agrees). If the fund later pays out amounts you already included in income, those payments are tax-free and they reduce the fund’s earnings and profits. This tax-free rule does not apply to U.S. shareholders when the fund is a controlled foreign corporation; those shareholders are handled under different rules. Your stock basis goes up by amounts you included in income and goes down by tax-free distributions. “Ordinary earnings” means the fund’s earnings and profits minus its net capital gain, and net capital gain cannot be more than the fund’s earnings and profits. A 10-percent U.S. corporate owner gets special foreign tax credit treatment and is treated like a U.S. shareholder of a controlled foreign corporation if it meets certain ownership tests. Income already taxed at a foreign rate higher than 90% of the top U.S. corporate rate, or U.S.-source income effectively connected to U.S. business (and not treaty-exempt), can be excluded. The Treasury will make rules to prevent the same item of income from being taxed more than once.
Full Legal Text
Title 26, §1293
Internal Revenue Code, Source: USLM XML via OLRC
(a)Inclusion
(1)In general
Every United States person who owns (or is treated under section 1298(a) as owning) stock of a qualified electing fund at any time during the taxable year of such fund shall include in gross income—
(A)as ordinary income, such shareholder’s pro rata share of the ordinary earnings of such fund for such year, and
(B)as long-term capital gain, such shareholder’s pro rata share of the net capital gain of such fund for such year.
(2)Year of inclusion
The inclusion under paragraph (1) shall be for the taxable year of the shareholder in which or with which the taxable year of the fund ends.
(b)Pro rata share
The pro rata share referred to in subsection (a) in the case of any shareholder is the amount which would have been distributed with respect to the shareholder’s stock if, on each day during the taxable year of the fund, the fund had distributed to each shareholder a pro rata share of that day’s ratable share of the fund’s ordinary earnings and net capital gain for such year. To the extent provided in regulations, if the fund establishes to the satisfaction of the Secretary that it uses a shorter period than the taxable year to determine shareholders’ interests in the earnings of such fund, pro rata shares may be determined by using such shorter period.
(c)Previously taxed amounts distributed tax free
If the taxpayer establishes to the satisfaction of the Secretary that any amount distributed by a passive foreign investment company is paid out of earnings and profits of the company which were included under subsection (a) in the income of any United States person, such amount shall be treated, for purposes of this chapter, as a distribution which is not a dividend; except that such distribution shall immediately reduce earnings and profits. If the passive foreign investment company is a controlled foreign corporation (as defined in section 957(a)), the preceding sentence shall not apply to any United States shareholder (as defined in section 951(b)) in such corporation, and, in applying section 959 to any such shareholder, any inclusion under this section shall be treated as an inclusion under section 951(a)(1)(A).
(d)Basis adjustments
The basis of the taxpayer’s stock in a passive foreign investment company shall be—
(1)increased by any amount which is included in the income of the taxpayer under subsection (a) with respect to such stock, and
(2)decreased by any amount distributed with respect to such stock which is not includible in the income of the taxpayer by reason of subsection (c).
A similar rule shall apply also in the case of any property if by reason of holding such property the taxpayer is treated under section 1298(a) as owning stock in a qualified electing fund.
(e)Ordinary earnings
For purposes of this section
(1) Ordinary earnings
(2)Limitation on net capital gain (3) Determination of earnings and profits
A qualified electing fund’s net capital gain for any taxable year shall not exceed its earnings and profits for such taxable year.
(f)Foreign tax credit allowed in the case of 10-percent corporate shareholder
For purposes of section 960—
(1)any amount included in the gross income under subsection (a) shall be treated as if it were included under section 951(a),
(2)any amount excluded from gross income under subsection (c) shall be treated in the same manner as amounts excluded from gross income under section 959, and
(3)a domestic corporation which owns (or is treated under section 1298(a) as owning) stock of a qualified electing fund shall be treated in the same manner as a United States shareholder of a controlled foreign corporation (and such qualified electing fund shall be treated in the same manner as such controlled foreign corporation) if such domestic corporation meets the stock ownership requirements of subsection (a) or (b) of section 902 (as in effect before its repeal) with respect to such qualified electing fund.
(g)Other special rules
(1)Exception for certain income
For purposes of determining the amount included in the gross income of any person under this section, the ordinary earnings and net capital gain of a qualified electing fund shall not include any item of income received by such fund if—
(A)such fund is a controlled foreign corporation (as defined in section 957(a)) and such person is a United States shareholder (as defined in section 951(b)) in such fund, and
(B)such person establishes to the satisfaction of the Secretary that—
(i)such income was subject to an effective rate of income tax imposed by a foreign country greater than 90 percent of the maximum rate of tax specified in section 11, or
(ii)such income is—
(I)from sources within the United States,
(II)effectively connected with the conduct by the qualified electing fund of a trade or business in the United States, and
(III)not exempt from taxation (or subject to a reduced rate of tax) pursuant to a treaty obligation of the United States.
(2)Prevention of double inclusion
The Secretary shall prescribe such adjustment to the provisions of this section as may be necessary to prevent the same item of income of a qualified electing fund from being included in the gross income of a United States person more than once.
Legislative History
Notes & Related Subsidiaries
Editorial Notes
References in Text
section 902 (as in effect before its repeal), referred to in subsec. (f)(3), means section 902 of this title as in effect before its repeal by Pub. L. 115–97, title I, § 14301(a), Dec. 22, 2017, 131 Stat. 2221.
Amendments
2017—Subsec. (f)(3). Pub. L. 115–97 added par. (3). 1997—Subsecs. (a)(1), (d). Pub. L. 105–34 substituted “section 1298(a)” for “section 1297(a)”. 1993—Subsec. (c). Pub. L. 103–66 inserted at end “If the passive foreign investment company is a controlled foreign corporation (as defined in section 957(a)), the preceding sentence shall not apply to any United States shareholder (as defined in section 951(b)) in such corporation, and, in applying section 959 to any such shareholder, any inclusion under this section shall be treated as an inclusion under section 951(a)(1)(A).” 1988—Subsec. (b). Pub. L. 100–647, § 1012(p)(15), inserted at end “To the extent provided in
Regulations
, if the fund establishes to the satisfaction of the Secretary that it uses a shorter period than the taxable year to determine shareholders’ interests in the earnings of such fund, pro rata shares may be determined by using such shorter period.” Subsec. (c). Pub. L. 100–647, § 1012(p)(23), inserted “, for purposes of this chapter,” after “shall be treated”, and “; except that such distribution shall immediately reduce earnings and profits” after “is not a dividend”. Subsec. (e)(3). Pub. L. 100–647, § 1012(p)(18), added par. (3). Subsec. (g). Pub. L. 100–647, § 1012(p)(32), added subsec. (g).
Statutory Notes and Related Subsidiaries
Effective Date
of 2017 AmendmentAmendment by Pub. L. 115–97 applicable to taxable years of foreign corporations beginning after Dec. 31, 2017, and to taxable years of United States shareholders in which or with which such taxable years of foreign corporations end, see section 14301(d) of Pub. L. 115–97, set out as a note under section 78 of this title.
Effective Date
of 1997 AmendmentAmendment by Pub. L. 105–34 applicable to taxable years of United States persons beginning after Dec. 31, 1997, and to taxable years of foreign corporations ending with or within such taxable years of United States persons, see section 1124 of Pub. L. 105–34, set out as a note under section 532 of this title.
Effective Date
of 1993 AmendmentAmendment by Pub. L. 103–66 applicable to taxable years of foreign corporations beginning after Sept. 30, 1993, and to taxable years of United States shareholders in which or with which such taxable years of foreign corporations end, see section 13231(e) of Pub. L. 103–66, set out as a note under section 951 of this title.
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 Date
Section applicable to taxable years of foreign corporations beginning after Dec. 31, 1986, see section 1235(h) of Pub. L. 99–514, set out as a note under section 1291 of this title.
Reference
Citations & Metadata
Citation
26 U.S.C. § 1293
Title 26, Internal Revenue Code
Last Updated
Sep 22, 2026
Release point: 119-110