Section I—Income From U.S. Sources Not Effectively Connected With the Conduct of a…

Note: Complete Section I only if you derived U.S. source income not effectively connected with the conduct of a trade or business in the United States and either your withholding tax liability was not correctly withheld at source or not correctly reported on Form 1042-S, you have a QDD tax liability (see section 3.09 of the Qualified Intermediary Agreement), or you are claiming a credit or refund of an amount withheld at source. You must attach any Forms 1042-S (and any supporting documentation) related to amounts for which you are claiming a credit or refund for overwithholding (see the instructions for line 5i). The amount reported in column (e) is the amount that was actually withheld at source (and not repaid to you by the withholding agent), as reported to you in box 10 of the Form(s) 1042-S issued by the withholding agent(s). See Claim for Refund or Credit, earlier, for additional documentation requirements.

Only report amounts on these lines if:

• The amount received is fixed or determinable, annual or periodic (FDAP) (see definition below);

• The amount received is includible in the gross income of the foreign corporation. Therefore, receipts that are excluded from income (for example, interest income received on state and local bonds that is excluded under section 103) would not be included as income in Section I;

• The amount received is from U.S. sources (see Source of Income Rules, earlier);

• The amount received is not effectively connected with the conduct of a U.S. trade or business (see Section II, later);

• The amount received is not exempt (by Code) from taxation. For example, interest on deposits that are exempted by section 881(d) would not be included as income in Section I. In addition, certain portfolio interest is not taxable for obligations issued after July 18, 1984. See section 881(c) for more details; or

• If you are a QDD, report all QDD tax liabilities (see Qualified Intermediary Agreement), whether or not the amounts are subject to withholding or correctly withheld.

18 Instructions for Form 1120-F (2025)

received less the tax imposed on any interest included in the payment received. This rule applies to payments received for OID obligations issued after March 31, 1972.

Certain OID is not taxable for OID obligations issued after July 18, 1984. See section 881(c) for more details.

For rules that apply to other OID obligations, see Pub. 515. 5. Gains from the sale or exchange of patents, copyrights, and other intangible property if the gains are from payments that are contingent on the productivity, use, or disposition of the property or interest sold or exchanged.

For more information, see section 881(a) and Regulations section 1.881-2.

Note: For purposes of determining whether its income is taxable under section 881(a), a corporation created or organized in Guam, American Samoa, the Northern Mariana Islands, or the U.S. Virgin Islands will not be treated as a foreign corporation if it meets the rules of section 881(b). For dividends paid after October 22, 2004, a corporation created or organized in Puerto Rico will be taxed under section 881(a) at a rate of 10% with respect to such dividends received during the tax year in the circumstances outlined in section 881(b)(2).

Line 9. Gross Transportation Income A 4% tax is imposed on a foreign corporation’s U.S. source gross transportation income for the tax year. U.S. source gross transportation income is generally any gross income that is transportation income if such income is treated as from U.S. sources.

Transportation income is any income from or connected with:

• The use (or hiring or leasing for use) of a vessel or aircraft; or

• The performance of services directly related to the use of a vessel or aircraft. For this purpose, the term “vessel or aircraft” includes any container used in connection with a vessel or aircraft.

Generally, 50% of all transportation income that is attributable to transportation that either begins or ends in the United States is treated as from U.S. sources. See section 863(c)(2)(B) for a special rule for personal service income.

Exceptions. U.S. source gross transportation income does not include income that is:

• Effectively connected with the conduct of a U.S. trade or business, or

• Taxable in a territory of the United States under the provisions of the Internal Revenue Code as applied to that territory.

Transportation income of the corporation will not be treated as ECI unless:

• The corporation has a fixed place of business in the United States involved in the earning of transportation income; and

• Substantially all of the corporation’s U.S. source gross transportation income (determined without regard to the rule that such income does not include ECI) is attributable to regularly scheduled transportation (or, in the case of income from the leasing of a vessel or aircraft, is attributable to a fixed place of business in the United States).

derivatives dealer capacity, include a statement detailing each type of income. In addition, if the foreign corporation received a specified federal procurement payment (as defined in section 5000C(b)) that was not fully withheld upon at source, enter the payment in Section I, line 10, column (b); enter a 2% rate of tax in column (c); enter the tax liability in column (d); and enter any withholding in column (e).

Increase or decrease in tax attributable to partner’s addi- tional reporting year tax. If the taxpayer is a foreign corporate partner and received a Form 8986 from a partnership that has elected to have each reviewed partner take into account the partner’s share of the adjustments, as finally determined, instead of paying the imputed underpayment, the foreign corporate partner (taxpayer) will have to complete Form 8978 to report adjustments shown on the Form 8986 they received from the partnership. The foreign corporate partner (taxpayer) must complete a separate Form 8978 to report adjustments pertaining to income that is effectively connected with the conduct of a trade or business in the United States under section 882 (an “ECI Form 8978”) and a separate Form 8978 to report adjustments pertaining to income from U.S. sources not effectively connected with the conduct of a trade or business in the United States under section 881 (an “FDAP Form 8978”). Include any increase or decrease in taxes due from the FDAP Form 8978, line 14, that was not fully withheld upon at source, on a separate line on Form 1120-F, Section I, line 10. Enter “From Form 8978” in column (a) and skip (leave blank) columns (b) and (c). Enter in column (d) the amount of the increase or decrease from the FDAP Form 8978, line 14. Enter any withholding in column (e). Attach the FDAP Form 8978 to Form 1120-F.

Note: The taxpayer will generally skip lines 3a, 3b, 4, 7, 9a, 9b, and 10 of the FDAP Form 8978.

Line 13 Check the “Yes” box if you received an item of income during the tax year with respect to which you are treated as fiscally transparent under the laws where you are organized. In such a case, you may not claim a reduced rate of tax under a treaty with respect to that item. See Regulations section 1.894-1(d)(1).

If the item of income has been withheld upon, your interest holders may, however, be able to claim treaty benefits, but only if the tax jurisdiction in which your interest holders qualify for treaty benefits treats you as fiscally transparent and the interest holders are not fiscally transparent with respect to that item of income. An interest holder claiming a benefit should file a separate Form 1120-F, if appropriate. See Regulations section 1.894-1(d)(3) for the definition of “fiscally transparent” and Regulations section 1.894-1(d)(5) for examples.