General Instructions

Regulations section 1.861-8.   Under section 882(c), a foreign corporation's expenses are deductible against its U.S. taxable income only if they are connected with income effectively connected with the conduct of a trade or business in the United States (“ECI”). The proper allocation and apportionment of deductions for this purpose is generally determined under the provisions of Regulations section 1.861-8 and Temporary Regulations section 1.861-8T, with special rules for the allocation and apportionment of research and experimentation expenses at Regulations section 1.861-17. Under these regulations, a taxpayer must allocate deductions to the class of gross income to which the deduction is definitely related and then, if necessary, apportion deductions among the groups of income included in the class. Generally, deductions are allocated and apportioned on the basis of the factual relationship between the deduction and gross income. (Under section 882(c)(1)(B), charitable contributions that are deductible under section 170 reduce ECI whether or not connected with such income.) Use Schedule H (Form 1120-F) to report expenses, other than interest expense and bad debt expense, allocated and apportioned to ECI and non-ECI. Interest expense of a foreign corporation is allocated to ECI exclusively (except to the extent provided in certain tax treaties) under the rules provided in Regulations section 1.882-5 and is reported on Schedule I (Form 1120-F). See Regulations section 1.882-5(a)(2). Bad debt expense allocated to ECI is reported directly on Form 1120-F, Section II, line 15.

Purpose of Schedule

Schedule H (Form 1120-F) is used by a foreign corporation that files Form 1120-F to report the amount of the foreign corporation's deductible expenses that are allocated and apportioned under Regulations sections 1.861-8 and 1.861-17 and Temporary Regulations section 1.861-8T between ECI and non-ECI. The results reported on Schedule H are included on Form 1120-F, Section II, line 26; and, for banks only, on Schedule M-3 (Form 1120-F), Part III, line 31.

Who Must File

Any foreign corporation that is required to file Form 1120-F and is (or is treated as) engaged in a trade or business within the United States at any time during the tax year must complete Schedule H and attach it to its Form 1120-F.

Protective returns.   If the foreign corporation files a protective Form 1120-F under Regulations section 1.882-4(a)(3)(vi), Schedule H need not be completed or attached to the protective Form 1120-F.

Treaty-based return reporting of business profits attributable to a U.S. permanent establishment.   Do not complete Schedule H if the corporation files Form 1120-F pursuant to an income tax treaty to report business profits attributable to a U.S. permanent establishment and applies OECD Transfer Pricing Guidelines in lieu of the ECI and expense allocation and apportionment rules of section 882(c) and Regulations sections 1.861-8 and 1.861-17 and Temporary Regulations section 1.861-8T. This treaty-based reporting is permitted only if the applicable income tax treaty and accompanying documents (such as Exchange of Notes) expressly provide that attribution of business profits to a U.S. permanent establishment is determined under OECD Transfer Pricing Guidelines applied by analogy. See the Instructions for Schedule M-3 (Form 1120-F) for the reporting of book-tax differences in Parts II and III of that schedule under a treaty-based return position pursuant to OECD Transfer Pricing Guidelines. See also Form 8833, Treaty-Based Return Position Disclosure Under Section 6114 or 7701(b).


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