(a) In general. -- Except as otherwise provided in this section, for purposes of this subpart, the term "foreign trading gross receipts" means the gross receipts of any FSC which are --
(1) from the sale, exchange, or other disposition of export property,
(2) from the lease or rental of export property for use by the lessee outside the United States,
(3) for services which are related and subsidiary to --
(A) any sale, exchange, or other disposition of export property by such corporation, or
(B) any lease or rental of export property described in paragraph (2) by such corporation,
(4) for engineering or architectural services for construction projects located (or proposed for location) outside the United States, or
(5) for the performance of managerial services for an unrelated FSC or DISC in futherance of the production of foreign trading gross receipts described in paragraph (1), (2), or (3).
Paragraph (5) shall not apply to a FSC for any taxable year unless at least 50 percent of its gross receipts for such taxable year is derived from activities described in paragraph (1), (2), or (3).
(b) Foreign management and foreing economic process requirements. --
(1) In general. -- Except as provided in paragraph (2) --
(A) a FSC shall be treated as having foreign trading gross receipts for the taxable yar only if the management of such corporation during such taxable year takes place outside the United States as required by subsection (c), and
(B) a FSC has foreign trading gross receipts from any transaction onlyif economic processes with respect to such transaction take place outside the United States as required by subsection (d).
(2) Exception for small FSC. --
(A) In general. -- Paragraph (1) shall not apply with respect to any small FSC.
(B) Limitation on amount of foreign trading gross receipts of small FSC taken into account. --
(i) In general. -- Any foreign trading gross receipts of a small FSC for the taxable year which exceed $5,000,000 shall not be taken into account in determining the exempt foreign trade income of such corporation and shall not be taken into account under any other provision of this subpart.
(ii) Allocation of limitation. -- If the foreign trading gross receipts of a small FSC exceed the limitation of clause (i), the corporation may allocate such limitation among such gross receipts in such manner as it may select (at such time and in such manner as may be prescribed in regulations).
(iii) Receipts of controlled group aggregated. -- For purposes of applying clauses (i) and (ii), all small FSC's which are members of the same controlled group of corporations shall be treated as a single corporation.
(iv) Allocation of limitation among members of controlled group. -- The limitation under clause (i) shall be allocated amont the foreign trading gross receipts of small FSC's which are members of the same controlled group of corporations in a manner provided in regulations prescribed by the Secretary.
(c) Requirement that FSC be managed outside the United States. -- The management of a FSC meets the requirements of this subsection for the taxable year if --
(1) all meetings of the board of directors of the corporation, and all meetings of the shareholders of all corporation, are outside the United States,
(2) the principal bank account of the corporation is maintained in a foreign country which meets the requirements of section 927(e)(3) or in a possession of the United States at all times during the taxable year, and
(3) all dividends, legal and accounting fees, and salaries of officers and members of the board of directors of the corporation disbursed during the taxable year are disbursed out of bank accounts of the corporation maintained outside the United States.
(d) Requirements that economic processes take place outside the United States. --
(1) In general. -- The requirements of this subsection are met with respect to the gross receipts of a FSC derived from an transaction if --
(A) such corporation (or any person acting under a contract with such corporation) has participated outside the United States in the solicitation (other than advertising), the negotiation, or the making of the contract relating to such transaction, and
(B) the foreign direct costs incurred by the FSC attributable to the transaction equal or exceed 50 percent of the total direct cost attributable to the transaction.
(2) Alternative 85-percent test. -- A corporation shall be treated as satisfying the requirements of paragraph (1)(B) with respect to any transaction if, with respect to each of at least 2 paragraphs of subsection (e), the foreign direct costs incurred by such corporation attributable to activities described in such paragraph equal or exceed 85 percent of the total direct costs attributable to activities described in such paragraph.
(3) Definitions. -- For purposes of this subsection --
(A) Total direct costs. -- The term "total direct costs" means, with respect to any transaction, the total direct costs incurred by the FSC attributable to activities described in subsection (e) performed at any location by the FSC or any person acting under a contract with such FSC.
(B) Foreign direct costs. -- The term "foreign direct costs" means, with respect to any transaciton, the portion of the total direct costs which are attributable to activities performed outside the United States.
(4) Rules for commissions, etc. -- The Secretary shall prescribe such regulations as may be necessary to carry out the purposes of this subsection and subsection (e) in the case of commissions, rentals, and furnishing of services.
(e) Activities relating to disposition of export property. -- The activities referred to in subsection (d) are --
(1) advertising and sales promotion,
(2) the processing of customer orders and the arranging for delivery of the export property,
(3) transportation from the time of acquisition by the FSC (or, in the case of a commission relationship, from the beginning of such relationship for such transaction) to the delivery to the customer.
(4) the determination and transmittal of a final invoice or statement of account and the receipt of payment, and
(5) the assumption of credit risk.
(f) Certain receipts not included in foreign trading gross receipts. --
(1) Certain receipts excluded on basis of use; subsidized receipts and receipts from related parties excluded. -- The term "foreign trading gross receipts" shall not inclue receipts of a FSC from a transaction if --
(A) the export property or services --
(i) are for ultimate use in the United States, or
(ii) are for use by the United States or any instrumentality thereof and such use of export property or services is required by law or regulation.
(B) such transaction is accomplished by a subsidy granted by the United States or any instrumentality thereof, or services is required by law or regulation.
(C) such receipts are from another FSC which is a member of the same controlled group of corporations of which such corporation is a member.
In the case of gross receipts of a FSC from a transaction involving any property, subparagraph (C) shall not apply if such FSC (and all other FSC's which are members of the same controlled group and which receive gross receipts from a transacion involving such property) do not use the pricing rules under paragraph (1) of section 925(a) (or the corresponding provisions of the regulations prescribed under section 925(b)) with respect to any transaction involving such property.
(2) Investment income; carrying charges. -- The term "foreign trading gross receipts" shallnot include any investment income or carrying charges.
925. Transfer pricing rules
(a) In general. -- In the case of a sale of export property to a FSC by a person described in section 482, the taxable income of such FSC and such person shall be based upon a transfer price which would allow such FSC to derive taxable income attributable to such sale (regardless of the sales price actually charged) in an amount which does not ex
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