General Instructions

Table of Contents

Future Developments

For the latest information about developments related to Schedule I (Form 1120-F) and its instructions, such as legislation enacted after they were published, go to www.irs.gov/form1120f.

Purpose of Schedule

Schedule I (Form 1120-F) is used to report the amount of interest expense allocable to effectively connected income (“ECI”) and the deductible amount of such allocation for the tax year under section 882(c) and Regulations section 1.882-5. The schedule also identifies the various elections the taxpayer uses, and discloses the basic calculations for the year under Regulations sections 1.882-5(a)(7) and (d)(5), and under the branch profits tax rules of Regulations section 1.884-1(e)(3).

Note.

The tax election under Regulations section 1.884-1(e)(3) is not effectuated under the regulations by its identification on Schedule I (Form 1120-F). See the requirements for the time, place and manner for making the branch profits tax liability reduction election under Regulations section 1.884-1(e)(3).

Under Regulations section 1.882-5, the amount of interest expense of a foreign corporation that is allocable under section 882(c) to income which is effectively connected (or treated as effectively connected) with the conduct of a trade or business within the United States is the sum of the interest expense allocable by the foreign corporation under the three-step process set forth in Regulations sections 1.882-5(b), (c), and (d), or (e) and the directly allocated interest expense determined under Regulations section 1.882-5(a)(1)(ii). The interest allocation rules of Regulations section 1.882-5 are the exclusive rules for allocating interest expense under section 882(c) to effectively connected income and for attributing interest expense to business profits of a U.S. permanent establishment under all income tax treaties other than treaties that expressly permit attribution of business profits to a U.S. permanent establishment under application of the OECD Transfer Pricing Guidelines, by analogy. For examples of treaties that expressly provide for such attribution, see Article 7 (Business Profits) and the accompanying Exchange of Notes of the U.S. income tax treaties with the United Kingdom (2004), Japan (2005), Germany (2008), Belgium (2008), Canada (2009), Bulgaria (2009), and Iceland (2009). If the foreign corporation files its tax return using a treaty-based method of the type provided in these treaties, see Treaty-based return positions below for reporting requirements.

Who Must File

All foreign corporations that have interest expense allocable to ECI under section 882(c) must complete Schedule I to report this allocation, regardless of whether the amount allocable under Regulations section 1.882-5 is deductible in the current year, or is otherwise deferred or permanently disallowed under other sections of the Internal Revenue Code (e.g., sections 163(e), 163(j), 263A, 265(a), 267(a)(3)). The information reported on Schedule I is also needed to complete Form 1120-F, Section III (the determination of the branch-level interest tax under section 884(f)). Interest expense that is treated as “branch interest” under Regulations section 1.884-4(b) may be subject to information reporting under section 1461 or section 6049 and potential withholding under sections 1441 and 1442. A foreign corporation that is a reporting corporation and required to file Form 1120-F must complete Schedule I and attach it to Form 1120-F.

Reporting corporation.   A reporting corporation is any foreign corporation that is engaged in a trade or business or treated as engaged in a trade or business within the United States directly or indirectly at any time during the tax year.

Treaty-based return positions.   If the corporation determines its interest expense attributable to its business profits of a U.S. permanent establishment pursuant to the express provisions and accompanying documents of an applicable treaty instead of under Regulations section 1.882-5, then Schedule I still must be completed applying the rules of Regulations section 1.882-5 and attached to Form 1120-F. The corporation is also required to complete and attach Form 8833, Treaty-Based Return Position Disclosure.

Note.

See Purpose of Schedule above for examples of treaties that expressly permit interest expense to be determined under rules other than Regulations section 1.882-5.

Exceptions from Filing Schedule I

A foreign corporation is not required to file Schedule I if it (a) does not have a trade or business within the United States, (b) has no worldwide interest expense for the tax year to allocate under Regulations section 1.882-5, or (c) conducts limited activities in the United States for the tax year that it determines do not give rise to effectively connected income, or do not give rise to a U.S. permanent establishment to which business profits are attributable, and the corporation files a protective income tax return under Regulations section 1.882-4(a)(3)(vi).

Protective elections on protective returns.   A corporation that files a protective tax return on Form 1120-F under Regulations section 1.882-4(a)(3)(vi) may voluntarily file Schedule I with the protective return to preserve timely elections under Regulations section 1.882-5(a)(7) if the return is filed by the original due date (including extensions) of the corporation's Form 1120-F. The protective elections are not effective if filed during the additional extended period described under Regulations section 1.882-4(a)(3). The foreign corporation need only complete the relevant portions of Schedule I that identify its right to use the following elections:

  • The Adjusted U.S.-Booked Liability method (“AUSBL”) or Separate Currency Pools (“SCP”) method (item B check boxes);

  • The adjusted basis or fair market value method for valuing its average assets in Steps 1 and 2 of the computation (line 1 check boxes);

  • The actual or fixed ratio in Step 2 (line 6 check boxes);

  • The published 30-day LIBOR election for banks under the AUSBL method in Step 3 (line 10 check box); and

  • The de minimis foreign currency election under the Separate Currency Pools method in Step 3 (line 16b check box).

  The corporation need only identify the protective election in the first year it is required to be made under Regulations section 1.882-5(a)(7) or in any year a taxpayer is eligible to adopt or change an election and chooses to do so for that year. For example, an election to use the adjusted U.S.-booked liability method or the separate currency pools method is an election that generally must be maintained for a minimum five-year period. However, the election available to foreign banks to use 30-day LIBOR under the AUSBL method in Step 3 must be made each year. If a corporation is subject to Regulations section 1.882-5 for the first time, the election is due with a timely filed return (excluding the additional extended period provided by Regulations section 1.882-4(a)(3)) whether or not the taxpayer files a protective return under Regulations section 1.882-4(a)(3)(vi). The protective election need not be filed with subsequent protective returns filed under Regulations section 1.882-4(a)(3)(vi) for any subsequent year to which the minimum five-year period applies. However, the indication of the election with a protective return is only effective for a year that the corporation is engaged in trade or business within the United States. Accordingly, if a protective election is made for a first year protective return and in fact the taxpayer is not engaged in trade or business until the second year of activity within the United States, the protective election made in the first year is not effective for the corporation's second year of activity because Regulations section 1.882-5 is not applicable to the corporation until such second year. The elections used by a taxpayer for all years in which it files Form 1120-F and reports effectively connected income must be shown on Schedule I, including years subsequent to the year in which an election under Regulations section 1.882-5(a)(7) is made.

  A corporation that files a protective return under Regulations section 1.882-4(a)(3)(vi) need not enter amounts on Schedule I (other than for the published LIBOR election on line 10d) in order to preserve an allocation method. If a taxpayer files a protective return under Regulations section 1.882-4(a)(3)(vi) and does not file Schedule I to identify the relevant elections under Regulations section 1.882-5 for an applicable year, then the Director of Field Operations is authorized to make all applicable allocation method elections on behalf of the corporation for such applicable year if it is later determined that the taxpayer was engaged in trade or business within the United States and had ECI during the year.

Note.

Under Regulations section 1.882-5(a)(7), no interest expense allocation elections may be made on an amended return. In addition, the relief for late tax elections provided under the rules of Regulations section 301.9100-1 (and any guidance promulgated thereunder) is not available. An election identified on line 1 of a change from a fair market value method to a previously elected adjusted basis method for reporting U.S. assets is not effective without advance consent of the Commissioner or his delegate. See Regulations section 1.882-5(b)(2)(ii)(A).

Other Forms and Schedules Related to Schedule I

Form 1120-F, Schedule L, and Schedule M-3 (Form 1120-F).   The set or set(s) of books that give rise to U.S.-booked liabilities under Regulations section 1.882-5(d)(2) are the same sets of books and records that are reportable as of the tax year end on Form 1120-F, Schedule L. They are also the same sets of books and records that are used by foreign banks to report income and expenses on Schedule M-3 (Form 1120-F).

Form 1120-F, Section III, Part II (branch-level interest tax).   The amount of interest expense from Schedule I, line 24d is reportable on Form 1120-F, Section III, Part II, line 7b. The amount of the allocation under Regulations section 1.882-5 reportable on Schedule I, line 23 is reportable on Form 1120-F, Section III, Part II, line 7c.

Schedule M-3 (Form 1120-F), Part III, lines 26b and 26c.   The amount of interest expense allocation reportable on Schedule I, line 23 is includible on Schedule M-3 (Form 1120-F), Part III, line 26b, columns (d) and (e). The amounts subject to deferral and disallowance on Schedule I, lines 24a through 24c are reportable on Schedule M-3 (Form 1120-F), Part III, line 26c, columns (b), (c), and (e).

Schedule P (Form 1120-F).    Enter amounts from Schedule P (Form 1120-F), lines 19, 17, and 14c on Schedule I, line 5, column (b); line 8, column (b); and line 9, column (b); respectively.

Assets and Liabilities Based on Schedule L Set(s) of Books and Records

Generally, the assets and liabilities required to be reported on Schedule L are the total assets and liabilities reflected on the set or sets of books of the foreign corporation that give rise to income effectively connected with the corporation's trade or business within the United States and to U.S.-booked liabilities (as defined in Regulations section 1.882-5(d)(2).) The total assets and liabilities reflected on such books include the third party U.S. assets (as defined in Regulations section 1.884-1(d)) and third party liabilities (whether with related or unrelated parties), as well as the interbranch assets and liabilities and assets that give rise to noneffectively connected income in whole or in part. Such books reflect the assets of the foreign corporation located in the United States and all other of its assets used in its trade or business within the United States (other than its assets giving rise to effectively connected income under sections 864(c)(6) or (7)), as authorized under Regulations section 1.6012-2(g)(1)(iii). A foreign corporation may instead report its worldwide assets, liabilities, and equity on Schedule L.

If the foreign corporation has more than one set of books and records relating to assets located in the United States or assets used in a trade or business conducted in the United States, it must report the combined amounts on Schedule L and must eliminate asset and liability amounts recorded between these books.

Required Reporting on Schedule I

Lines 1 through 9.   Schedule I requires disclosure of data and interest allocation elections for all parts of the three-step formula under Regulations section 1.882-5. On page 1, the corporation is required to complete Step 1 (lines 1 through 5) to determine its average U.S. assets, Step 2 (lines 6 through 7c) to determine its U.S.-connected liabilities, and Step 3 (lines 8 and 9) to determine its U.S.-booked liabilities under Regulations section 1.882-5(d)(2) and its related U.S.-booked interest expense. The total on line 9, column (c) is also used for purposes of determining the corporation's branch interest under section 884(f)(1)(A) and Regulations section 1.884-4(b), and in the calculation of the corporation's branch-level interest tax on excess interest under section 884(f)(1)(B) and Regulations section 1.884-4(a)(2). Line 8, column (c), and line 9, column (c) are also included in the interest expense allocation computation in Step 3 of the AUSBL method if elected by the corporation.

  
Lines 1 through 9 must be completed by all corporations required to file Schedule I, regardless of whether the corporation allocates interest expense under the AUSBL or Separate Currency Pools method for the applicable year.

Lines 10 through 20. Allocations, direct interest allocations, deferrals and other disallowances.   Step 3 of the AUSBL method is provided on lines 10 through 15. Step 3 of the Separate Currency Pools method is provided on lines 16a through 20. These Step 3 methods are mutually exclusive and cannot both apply to the corporation in the same year. The methods are subject to the general five-year minimum period election rules of Regulations section 1.882-5(a)(7).

AUSBL method filers.

AUSBL method filers complete all columns on lines 1 through 15 and lines 21 through 25. Do not complete lines 16a through 20.

Separate currency pools method filers.

Separate Currency Pools method filers complete all columns on lines 1 through 9 and lines 16a through 25. Do not complete lines 10 through 15.

Lines 21 through 25. Summary – Interest expense allocation and deduction under Regulations section 1.882-5

Line 22. Direct interest allocations.

Interest expense that is directly allocable under Regulations section 1.882-5(a)(1)(ii) in accordance with the rules of Temporary Regulations section 1.861-10T(b) or (c) is reported on line 22.

Line 23. Summary of Regulations section 1.882-5 allocation.

The amount of interest expense allocable to effectively connected income under Regulations section 1.882-5 is the sum of the amount allocated under either the AUSBL or Separate Currency Pools method on line 15 or 20, and the amount directly allocated to ECI and reportable on line 22. The resulting amount allocable and reported on line 23 is also reconciled and reported on Form 1120-F, Section III, Part II, line 7c (branch-level interest tax).

Line 24. Deferrals and disallowances under other Code sections.

The interest expense allocation reportable on line 23 is determined under Regulations section 1.882-5 before application of other Code sections that defer or disallow the interest deduction in whole or in part. See Regulations section 1.882-5(a)(5).

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