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§971 Definitions

Title 26 › 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 G — Export Trade Corporations › § 971

Last updated Sep 22, 2026|Official source

Summary

Sets rules for when a controlled foreign corporation can be an export trade corporation. To qualify, the corporation must be a controlled foreign corporation and, over the prior 3-year period, at least 90 percent of its gross income must come from sources outside the United States and at least 75 percent must be export trade income. If 50 percent or more of its gross income is export trade income from U.S.-grown agricultural products, it can qualify even if it does not meet the 75 percent test. A corporation cannot start qualifying for tax years beginning after October 31, 1971, unless it had qualified for some tax year beginning before that date. If it fails to qualify for any 3 consecutive taxable years after that date, it cannot qualify for later years. Explains key terms used for this rule. Export trade income means net income from four kinds of activities: sales of U.S.-made goods to unrelated buyers for use outside the U.S. and services tied to those sales; services tied to use abroad of patents, copyrights, formulas, goodwill, trademarks, franchises, or similar property owned by the maker of those goods; fees, rentals, or other pay for using export property or for technical services using it; and interest from certain export-trade debts. If mixed payments cannot be split by market tests, the export-related share is the part of the costs tied to the export property. Export trade assets are working capital for export sales, export inventory, foreign storage/handling/packaging/servicing facilities, and notes or other debt from unrelated buyers for export purchases or related services. Export promotion expenses are salaries, rent, depreciation, and other ordinary costs tied to getting export trade income, but U.S.-incurred expenses count only if at least 90 percent of each expense category is spent outside the U.S. Export property means things made, produced, grown, or extracted in the U.S. An unrelated person is anyone who is not a related person under section 954(d)(3).

Title 26, §971

Internal Revenue Code, Source: USLM XML via OLRC

(a)Export trade corporations

For purposes of this subpart, the term “export trade corporation” means—

(1)In general

A controlled foreign corporation (as defined in section 957) which satisfies the following conditions:

(A)90 percent or more of the gross income of such corporation for the 3–year period immediately preceding the close of the taxable year (or such part of such period subsequent to the effective date of this subpart during which the corporation was in existence) was derived from sources without the United States, and

(B)75 percent or more of the gross income of such corporation for such period constituted gross income in respect of which such corporation derived export trade income.

(2)Special rule

If 50 percent or more of the gross income of a controlled foreign corporation in the period specified in subsection (a)(1)(A) is gross income in respect of which such corporation derived export trade income in respect of agricultural products grown in the United States, it may qualify as an export trade corporation although it does not meet the requirements of subsection (a)(1)(B).

(3)Limitation

No controlled foreign corporation may qualify as an export trade corporation for any taxable year beginning after October 31, 1971, unless it qualified as an export trade corporation for any taxable year beginning before such date. If a corporation fails to qualify as an export trade corporation for a period of any 3 consecutive taxable years beginning after such date, it may not qualify as an export trade corporation for any taxable year beginning after such period.

(b)Export trade income

For the purposes of this subpart, the term “export trade income” means net income from—

(1)the sale to an unrelated person for use, consumption, or disposition outside the United States of export property (as defined in subsection (e)), or from commissions, fees, compensation, or other income from the performance of commercial, industrial, financial, technical, scientific, managerial, engineering, architectural, skilled, or other services in respect to such sales or in respect of the installation or maintenance of such export property;

(2)commissions, fees, compensation, or other income from commercial, industrial, financial, technical, scientific, managerial, engineering, architectural, skilled, or other services performed in connection with the use by an unrelated person outside the United States of patents, copyrights, secret processes and formulas, goodwill, trademarks, trade brands, franchises, and other like property acquired or developed and owned by the manufacturer, producer, grower, or extractor of export property in respect of which the export trade corporation earns export trade income under paragraph (1);

(3)commissions, fees, rentals, or other compensation or income attributable to the use of export property by an unrelated person or attributable to the use of export property in the rendition of technical, scientific, or engineering services to an unrelated person; and

(4)interest from export trade assets described in subsection (c)(4).

For purposes of paragraph (3), if a controlled foreign corporation receives income from an unrelated person attributable to the use of export property in the rendition of services to such unrelated person together with income attributable to the rendition of other services to such unrelated person, including personal services, the amount of such aggregate income which shall be considered to be attributable to the use of the export property shall (if such amount cannot be established by reference to transactions between unrelated persons) be that part of such aggregate income which the cost of the export property consumed in the rendition of such services (including a reasonable allowance for depreciation) bears to the total costs and expenses attributable to such aggregate income.

(c)Export trade assets

For purposes of this subpart, the term “export trade assets” means—

(1)working capital reasonably necessary for the production of export trade income,

(2)inventory of export property held for use, consumption, or disposition outside the United States,

(3)facilities located outside the United States for the storage, handling, transportation, packaging, or servicing of export property, and

(4)evidences of indebtedness executed by persons, other than related persons, in connection with payment for purchases of export property for use, consumption, or disposition outside the United States, or in connection with the payment for services described in subsections (b)(2) and (3).

(d)Export promotion expenses

For purposes of this subpart, the term “export promotion expenses” means the following expenses paid or incurred in the receipt or production of export trade income—

(1)a reasonable allowance for salaries or other compensation for personal services actually rendered for such purpose,

(2)rentals or other payments for the use of property actually used for such purpose,

(3)a reasonable allowance for the exhaustion, wear and tear, or obsolescence of property actually used for such purpose, and

(4)any other ordinary and necessary expenses of the corporation to the extent reasonably allocable to the receipt or production of export trade income.

No expense incurred within the United States shall be treated as an export promotion expense within the meaning of the preceding sentence, unless at least 90 percent of each category of expenses described in such sentence is incurred outside the United States.

(e)Export property

For purposes of this subpart, the term “export property” means any property or any interest in property manufactured, produced, grown, or extracted in the United States.

(f)Unrelated person

For purposes of this subpart, the term “unrelated person” means a person other than a related person as defined in section 954(d)(3).

Notes & Related Subsidiaries

Editorial Notes

Amendments

1971—Subsec. (a)(3). Pub. L. 92–178 added par. (3).

Statutory Notes and Related Subsidiaries

Treatment of Certain Former Export Trade Corporations Pub. L. 99–514, title XVIII, § 1876(m), Oct. 22, 1986, 100 Stat. 2901, provided that: “If—“(1) a corporation which is not an export trading corporation for its most recent taxable year ending before the date of the enactment of the Tax Reform Act of 1984 [

July 18, 1984] but was an export trading corporation for any prior taxable year, and “(2)(A) such corporation may not qualify as an export trade corporation for any taxable year beginning after

December 31, 1984, by reason of section 971(a)(3) of the Internal Revenue Code of 1954 [now 1986], or (B) such corporation makes an election, before the date 6 months after the date of the enactment of this Act [Oct. 22, 1986], not to be treated as an export trade corporation with respect to taxable years beginning after

December 31, 1984, rules similar to the rules of paragraphs (2) and (4) of section 805(b) of the Tax Reform Act of 1984 [set out as a note under section 991 of this title] shall apply to such corporation. For purposes of the preceding sentence, the term ‘export trade corporation’ has the meaning given such term by section 971 of such Code.”