[Code of Federal Regulations]
[Title 26, Volume 9]
[Revised as of April 1, 2002]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR1.881-2]

[Page 372-373]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1--INCOME TAXES--Table of Contents
 
Sec. 1.881-2  Taxation of foreign corporations not engaged in U.S. business.

    (a) Imposition of tax. (1) This section applies for purposes of 
determining the tax of a foreign corporation which at no time during the 
taxable year is engaged in trade or business in the United States. 
However, see also Sec. 1.882-2 where such corporation has an election in 
effect for the taxable year in respect to real property income or 
receives interest on obligations of the United States. Except as 
otherwise provided in Sec. 1.871-12, a foreign corporation to which this 
section applies is not subject to the tax imposed by section 11 or 
section 1201(a) but, pursuant to the provisions of section 881(a), is 
liable to a flat tax of 30 percent upon the aggregate of the amounts 
determined under paragraphs (b) and (c) of this section which are 
received during the taxable year from sources within the United States. 
Except as specifically provided in such paragraphs, such amounts do not 
include gains from the sale or exchange of property. To determine the 
source of such amounts, see sections 861 through 863, and the 
regulations thereunder.
    (2) The tax of 30 percent is imposed by section 881(a) upon an 
amount only to the extent the amount constitutes gross income.
    (3) Deductions shall not be allowed in determining the amount 
subject to tax under this section.
    (4) Except as provided in Sec. 1.882-2, a foreign corporation which 
at no time during the taxable year is engaged in trade or business in 
the United States has no income, gain, or loss for the taxable year 
which is effectively connected for the taxable year with the conduct of 
a trade or business in the United States. See section 864(c)(1)(B) and 
Sec. 1.864-3.
    (5) Gains and losses which, by reason of section 882(d) and 
Sec. 1.882-2, are treated as gains or losses which are effectively 
connected for the taxable year with the conduct of a trade or business 
in the United States by such a foreign corporation shall not be taken 
into account in determining the tax under this section. See, for 
example, paragraph (c)(2) of Sec. 1.871-10.
    (b) Fixed or determinable annual or periodical income.-- (1) General 
rule. The tax of 30 percent imposed by section 881(a) applies to the 
gross amount received from sources within the United States as fixed or 
determinable annual or periodical gains, profits, or income. Specific 
items of fixed or determinable annual or periodical income are 
enumerated in section 881(a)(1) as interest, dividends, rents, salaries, 
wages, premiums, annuities, compensations, remunerations, and 
emoluments, but other items of fixed or determinable annual or 
periodical gains, profits, or income are also subject to the tax as, for 
instance, royalties, including royalties for the use of patents, 
copyrights, secret processes and formulas, and other like property. As 
to the determination of fixed or determinable annual or periodical 
income, see paragraph (a) of Sec. 1.1441-2. For special rules

[[Page 373]]

treating gain on the disposition of section 306 stock as fixed or 
determinable annual or periodical income for purposes of section 881(a), 
see section 306(f) and paragraph (h) of Sec. 1.306-3.
    (2) Substitute payments. For purposes of this section, a substitute 
interest payment (as defined in Sec. 1.861-2(a)(7)) received by a 
foreign person pursuant to a securities lending transaction or a sale-
repurchase transaction (as defined in Sec. 1.861-2(a)(7)) shall have the 
same character as interest income received pursuant to the terms of the 
transferred security. Similarly, for purposes of this section, a 
substitute dividend payment (as defined in Sec. 1.861-3(a)(6)) received 
by a foreign person pursuant to a securities lending transaction or a 
sale-repurchase transaction (as defined in Sec. 1.861-2(a)(7)) shall 
have the same character as a distribution received with respect to the 
transferred security. Where, pursuant to a securities lending 
transaction or a sale-repurchase transaction, a foreign person transfers 
to another person a security in the interest on which would qualify as 
portfolio interest under section 881(c) in the hands of the lender, 
substitute interest payments made with respect to the transferred 
security will be treated as portfolio interest, provided that in the 
case of interest on an obligation in registered form (as defined in 
Sec. 1.871-14(c)(1)(i)), the transferor complies with the documentation 
requirement described in Sec. 1.871-14(c)(1)(ii)(C) with respect to the 
payment of substitute interest and none of the exceptions to the 
portfolio interest exemption in sections 881(c) (3) and (4) apply. See 
also Secs. 1.871-7(b)(2) and 1.894-1(c).
    (c) Other income and gains--(1) Items subject to tax. The tax of 30 
percent imposed by section 881(a) also applies to the following gains 
received during the taxable year from sources within the United States:
    (i) Gains described in section 631 (b) or (c), relating to the 
treatment of gain on the disposal of timber, coal, or iron ore with a 
retained economic interest;
    (ii) [Reserved]
    (iii) Gains from the sale or exchange after October 4, 1966, of 
patents, copyrights, secret processes and formulas, goodwill, 
trademarks, trade brands, franchises, or other like property, or of any 
interest in any such property, to the extent the gains are from payments 
(whether in a lump sum or in installments) which are contingent on the 
productivity, use, or disposition of the property or interest sold or 
exchanged, or from payments which are treated under section 871(e) and 
Sec. 1.871-11 as being so contingent.
    (2) Determination of amount of gain. The tax of 30 percent imposed 
upon the gains described in subparagraph (1) of this paragraph applies 
to the full amount of the gains and is determined (i) without regard to 
the alternative tax imposed by section 1201(a) upon the excess of net 
long-term capital gain over the net short-term capital loss; (ii) 
without regard to section 1231, relating to property used in the trade 
or business and involuntary conversions; and (iii) except in the case of 
gains described in subparagraph (1)(ii) of this paragraph, whether or 
not the gains are considered to be gains from the sale or exchange of 
property which is a capital asset.
    (d) Credits against tax. The credits allowed by section 32 (relating 
to tax withheld at source on foreign corporations), by section 39 
(relating to certain uses of gasoline and lubricating oil), and by 
section 6402 (relating to overpayments of tax) shall be allowed against 
the tax of a foreign corporation determined in accordance with this 
section.
    (e) Effective date. Except as otherwise provided in this paragraph, 
this section applies for taxable years beginning after December 31, 
1966. Paragraph (b)(2) of this section is applicable to payments made 
after November 13, 1997. For corresponding rules applicable to taxable 
years beginning before January 1, 1967, see 26 CFR 1.881-2 (Revised as 
of January 1, 1971).

[T.D. 7293, 38 FR 32796, Nov. 28, 1973, as amended by T.D. 8735, 62 FR 
53502, Oct. 14, 1997]