Federal

Territorial Economic Recovery Act

Source: Congress.gov · 545 words in original text

What This Bill Does

This bill changes tax rules for certain foreign corporations that operate in U.S. possessions like Puerto Rico and the Virgin Islands. It excludes specific income earned in these places from a tax calculation called "tested income," which reduces the amount of foreign earnings that U.S. shareholders must pay taxes on.

Who It Affects

Controlled foreign corporations (foreign companies owned by U.S. residents or companies) that do business in Puerto Rico, the Virgin Islands or other specified U.S. possessions. U.S. shareholders of these foreign corporations.

Key Provisions

- Income earned by a qualified possession corporation (a foreign company meeting certain requirements) that is effectively connected with active business conducted within a U.S. possession is excluded from tested income calculations. (Sec. 2(a)(1)) - A foreign corporation qualifies for this exclusion if, over the 3-year period before the tax year in question, at least 80 percent or more of its gross income came from sources within a U.S. possession. (Sec. 2(a)(2)) - A foreign corporation also must have at least 75 percent or more of its gross income effectively connected with active business conducted within a U.S. possession during the same 3-year period. (Sec. 2(a)(2)) - The term "possession of the United States" includes Puerto Rico, the Virgin Islands and any specified possession as defined in another part of tax law. (Sec. 2(a)(2))

What Changes

Foreign corporations meeting the requirements now exclude certain business income earned in U.S. possessions from their tested income calculations for tax purposes.

Important Definitions

"Controlled foreign corporation" means a foreign corporation owned by U.S. persons or entities. "Effectively connected with the active conduct of a trade or business" means income directly tied to running an actual business operation within a U.S. possession. "Qualified possession corporation" means a controlled foreign corporation that derives 80 percent or more of gross income from U.S. possessions and has 75 percent or more of gross income effectively connected with active business in those possessions. "Possession of the United States" means Puerto Rico, the Virgin Islands and any specified possession described in the existing tax code.

Effective Date

Taxable years of foreign corporations beginning after December 31, 2022, and taxable years of United States shareholders in which or with which those foreign corporation taxable years end. (Sec. 2(b))

I 118TH CONGRESS 1ST SESSION H. R. 1055 To amend the Internal Revenue Code of 1986 to exclude certain amounts from the tested income of controlled foreign corporations, and for other purposes. IN THE HOUSE OF REPRESENTATIVES FEBRUARY 14, 2023 Ms. PLASKETT (for herself and Ms. VELA´ZQUEZ) introduced the following bill; which was referred to the Committee on Ways and Means A BILL To amend the Internal Revenue Code of 1986 to exclude certain amounts from the tested income of controlled foreign corporations, and for other purposes. Be it enacted by the Senate and House of Representa- 1 tives of the United States of America in Congress assembled, 2 SECTION 1. SHORT TITLE. 3 This Act may be cited as the ‘‘Territorial Economic 4 Recovery Act’’. 5 VerDate Sep 11 2014 23:27 Mar 10, 2023 Jkt 039200 PO 00000 Frm 00001 Fmt 6652 Sfmt 6201 E:\BILLS\H1055.IH H1055 kjohnson on DSK79L0C42PROD with BILLS 2 •HR 1055 IH SEC. 2. INCOME OF CERTAIN QUALIFIED POSSESSION COR- 1 PORATIONS EXCLUDED FROM TESTED IN- 2 COME. 3 (a) IN GENERAL.—Section 951A of the Internal Rev- 4 enue Code of 1986 is amended— 5 (1) in subsection (c)(2)(A)(i), by striking ‘‘and’’ 6 at the end of subclause (IV), by striking ‘‘over’’ at 7 the end of subclause (V) and inserting ‘‘and’’, and 8 by adding at the end the following new subclause: 9 ‘‘(VI) any income of a qualified 10 possession corporation that is effec- 11 tively connected with the active con- 12 duct of a trade or business within a 13 possession of the United States, 14 over’’; and 15 (2) by adding at the end the following new sub- 16 sections: 17 ‘‘(g) POSSESSION OF THE UNITED STATES.—For 18 purposes of this section, the term ‘possession of the United 19 States’ means Puerto Rico, the Virgin Islands, and any 20 specified possession described in section 931(c). 21 ‘‘(h) QUALIFIED POSSESSION CORPORATION.—For 22 purposes of this section, the term ‘qualified possession cor- 23 poration’ means any controlled foreign corporation for any 24 taxable year, if, for the 3-year period (or the period during 25 which the controlled foreign corporation has been in exist- 26 VerDate Sep 11 2014 23:27 Mar 10, 2023 Jkt 039200 PO 00000 Frm 00002 Fmt 6652 Sfmt 6201 E:\BILLS\H1055.IH H1055 kjohnson on DSK79L0C42PROD with BILLS 3 •HR 1055 IH ence, if shorter) ending in the taxable year preceding the 1 taxable year in which the determination is made— 2 ‘‘(1) 80 percent or more of the gross income of 3 such corporation was derived from sources within a 4 possession of the United States, and 5 ‘‘(2) 75 percent or more of the gross income of 6 such corporation was effectively connected with the 7 active conduct of a trade or business within a pos- 8 session of the United States.’’. 9 (b) EFFECTIVE DATE.—The amendments made by 10 this section shall apply to taxable years of foreign corpora- 11 tions beginning after December 31, 2022, and to taxable 12 years of United States shareholders in which or with which 13 such taxable years of foreign corporations end. 14 Æ VerDate Sep 11 2014 23:27 Mar 10, 2023 Jkt 039200 PO 00000 Frm 00003 Fmt 6652 Sfmt 6301 E:\BILLS\H1055.IH H1055 kjohnson on DSK79L0C42PROD with BILLS

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