Computation of net foreign base company income
(c) Computation of net foreign base company income(1) General rule. The net foreign base company income of a controlled foreign corporation (as defined in paragraph (a)(4) of this section) is computed under the rules of this paragraph (c)(1). The principles of 1.904-5(k) shall apply where payments are made between controlled foreign corporations that are related persons (within the meaning of section 954(d)(3)). Consistent with these principles, only payments described in 1.954-2(b)(4)(ii)(B)(2) may be offset as provided in 1.904-5(k)(2). (i) Deductions against gross foreign base company income. The net foreign base company income of a controlled foreign corporation is computed first by taking into account deductions in the following manner: (A) First, the gross amount of each item of income described in paragraph (c)(1)(iii) of this section is determined. (B) Second, any expenses definitely related to less than all gross income as a class shall be allocated and apportioned under the principles of sections 861, 864 and 904(d) to the gross income described in paragraph (c)(1)(i)(A) of this section. (C) Third, foreign personal holding company income that is passive within the meaning of section 904 (determined before the application of the high-taxed income rule of 1.904-4(c)) is reduced (but not below zero) by related person interest expense allocable to passive income under 1.904-5(c)(2); such interest must be further allocated and apportioned to items described in paragraph (c)(1)(iii)(B) of this section. (D) Fourth, the amount of each item of income described in paragraph (c)(1)(iii) of this section is reduced by other expenses allocable and apportionable to such income under the principles of sections 861, 864 and 904(d). (ii) Losses reduce subpart F income by operation of earnings and profits limitation. Except as otherwise provided in 1.954-2(g)(4), if after applying the rules of paragraph (c)(1)(i) of this section, the amount remaining in any category of foreign base company income or foreign personal holding company income is less than zero, the loss in that category may not reduce any other category of foreign base company income or foreign personal holding company income except by operation of the earnings and profits limitation of section 952(c)(1). (iii) Items of income(A) Income other than passive foreign personal holding company income. A single item of income (other than foreign personal holding company income that is passive) is the aggregate amount from all transactions that falls within a single separate category (as defined in 1.904-5(a)(4)(v)), and either