Country-by-country application of limitation on foreign tax credit based on taxable units

(a) In general Section 904 is amended by inserting after subsection (d) the following new subsection: (e) Country-by-Country application based on taxable units (1) In general Subsection (d) (and the provisions of this title referred to in paragraph (1) of such subsection) shall be applied separately with respect to each country by taking into account the aggregate income properly attributable or otherwise allocable to a taxable unit of the taxpayer which is a tax resident of (or, in the case of a branch, is located in) such country. (2) Taxable units (A) In general Except as otherwise provided by the Secretary, each item shall be attributable or otherwise allocable to exactly one taxable unit of the taxpayer. (B) Determination of taxable units Except as otherwise provided by the Secretary, the taxable units of a taxpayer are as follows: (i) General taxable unit The person that is the taxpayer and that is not otherwise described in a separate clause of this subparagraph. (ii) Certain foreign corporations Each foreign corporation with respect to which the taxpayer is a United States shareholder. (iii) Interests in pass-through entities Each interest held (directly or indirectly) by the taxpayer or any foreign corporation referred to in clause (ii) in a pass-through entity if such pass-through entity is a tax resident of a country other than the country with respect to which such taxpayer or foreign corporation (as the case may be) is a tax resident. (iv) Branches Each branch (or portion thereof) the activities of which are directly or indirectly carried on by the taxpayer or any foreign corporation referred to in clause (ii) and which give rise to a taxable presence in a country other than the country with respect to which such taxpayer or foreign corporation (as the case may be) is a tax resident. (3) Definitions and special rules For purposes of this subsection— (A) Tax resident Except as otherwise provided by the Secretary, the term tax resident means a person or entity subject to tax under the tax law of a country as a resident. If an entity is organized under the law of a country, or resident in a country, that does not impose an income tax with respect to such entities, such entity shall, except as provided by the Secretary, be treated as subject to tax under the tax law of such country for the purposes of the preceding sentence. (B) Pass-through entity Except as otherwise provided by the Secretary, the term pass-through entity includes any partnership or other entity to the extent that income, gain, deduction, or loss of the entity is taken into account in determining the income or loss of a person that owns (directly or indirectly) an interest in such entity. (C) Branch Except as otherwise provided by the Secretary, the term branch means a taxable presence of a tax resident in a country other than its country of residence as determined under such other country’s tax law. The Secretary shall provide regulations or other guidance applying such term to activities in a country that do not give rise to a taxable presence. (D) Treatment of fiscally autonomous jurisdictions Any fiscally autonomous jurisdiction shall be treated as a separate country. Any possession of the United States shall also be treated as a separate country. (E) Possession of the United States The term possession of the United States means each of American Samoa, the Commonwealth of the Northern Mariana Islands, the Commonwealth of Puerto Rico, Guam, and the Virgin Islands. (4) Regulations The Secretary shall issue such regulations or other guidance as may be necessary or appropriate to carry out, or prevent avoidance of, the purposes of this subsection, including regulations or other guidance— (A) providing for the application of this subsection to an entity or arrangement that is considered a tax resident of more than one country or of no country, (B) providing for the application of this subsection to hybrid entities or hybrid transactions (as such terms are used for purposes of section 267A), pass-through entities, passive foreign investment companies, trusts, and other entities or arrangements not otherwise described in this subsection, and (C) providing for the assignment of any item (including foreign taxes and deductions) to taxable units, including in the case of amounts not otherwise taken into account in determining taxable income under this chapter.. (b) Treatment of inadequate substantiation Section 904(d)(4)(C)(ii) is amended by striking paragraph (1)(A) and inserting paragraph (1)(C). (c) Application of foreign tax credit limitation with respect to foreign branches Section 904(d)(2)(J)(i) is amended— (1) by striking qualified business units (as defined in section 989(a)) in 1 or more foreign countries and inserting foreign branches described in section 904(e)(2)(B)(iv), and (2) by striking a qualified business unit and inserting a foreign branch. (d) Effective date The amendments made by this section shall apply to taxable years beginning after December 31, 2024.