Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 59-7

1959-1 C.B. 183

Sec. 901

IRS Headnote

The taxes imposed by the Republic of Cuba on (1) gross receipts of certain foreign corporations under Chapter VI, Article III of the Emergency Tax Law of January 29, 1931, as modified by Law of September 23, 1932, and regulated by Decree No. 2366 of September 25, 1935; (2) interest and dividends by Chapter VI, Article III, Tariff Second of the Emergency Tax Law of January 29, 1931, as amended by Law No. 7 of April 5, 1943; and (3) royalties by Chapter VI, Article III, Tariff Second, of the Emergency Tax Law of January 29, 1931, as amended by Article 52, Chapter X, Law No. 7 of April 5, 1943, are income taxes or taxes imposed in lieu of income or excess profits taxes within the meaning of section 901 or section 903 of the Internal Revenue Code of 1954 and are allowable as a credit against United States income tax under section 901 of the Code, subject to the limitation provided by section 904 of the Code.

Full Text

Rev. Rul. 59-7

Advice has been requested whether the taxes described below and imposed by the Republic of Cuba qualify as income taxes under section 901 of the Internal Revenue Code of 1954, or as taxes paid in lieu of a tax on income, war profits, or excess profits within the meaning of section 903 of the Code, with respect to which credit is allowable against United States income taxes, subject to the limitation imposed by section 904 of the Code.

Section 901 of the Internal Revenue Code of 1954 provides for the allowances of a credit against United States income taxes for taxes paid to a foreign country or a possession of the United States. Subsection (b) thereof provides, in part, as follows:

(b) AMOUNT ALLOWED.-Subject to the limitation of section 904, the following amounts shall be allowed as the credit under subsection (a):

(1) Citizens and Domestic Corporations.-In the case of a citizen of the United States and of a domestic corporation, the amount of any income, war profits, and excess profits taxes paid or accrued during the taxable year to any foreign country or to any possession of the United States; * * *.

Section 903 of the Code provides that:

For purposes of this subpart and of section 164(b), the term `income, war profits, and excess profits taxes' shall include a tax paid in lieu of a tax on income, war profits, or excess profits otherwise generally imposed by any foreign country or by any possession of the United States.

The Republic of Cuba, under the provisions of Article III of Chapter VI of the Emergency Tax Law of January 29, 1931, imposed a tax on the net profits of commercial, industrial and banking enterprises operating in that country, whether a corporation, partnership or individually owned. Article VII of such law defines net profits, in general, as gross income less ordinary and necessary expenses, and those of management and conservation and a reasonable allowance for depreciation. Article III of the law provides that individual merchants and manufacturers and all commercial and industrial companies or organizations shall pay a tax on net income at the rates designated as Tariff Third; and that corporations, silent partnership, the investment in which is represented by shares for stock, and those of limited liability with respect to the profit on the shares, if any, and banks and bankers and all associations under the general law, whether industrial or mercantile, organized in Cuba or abroad, for the manufacture of sugar, and individuals who engage in that industry, shall be taxed at the rates designated as Tariff Fourth. This law, which embodies certain provisions for the computation of tax by special classes of taxpayers who do not pay a tax on net profits at the rates provided in Tariff Third or Tariff Fourth, continues in effect. However, by Article I of the Law of September 23, 1932 (regulations for which were issued as Decree No. 2366 of September 25, 1935), there was added to Tariff Fourth a provision which requires that a tax of three percent (increased to three and six-tenths percent by the Law of December 20, 1939) shall be imposed on:

* * * the gross revenues obtained from all sources * * *, in substitution for the tax on net profits, by those foreign companies which do business in Cuba through the medium of branches, subsidiary companies, agents or lawful representatives, and which fix, by contract or otherwise, the cost and selling prices of the merchandise in which they deal, but which do not, in a reliable manner and one fully satisfactory to the Administration, show or demonstrate the correctness of those prices, * * *. The foregoing paragraph shall likewise include radio-telegraph, cable and radio-telephone companies. This tax shall likewise be paid instead of the present tax on profits, by those foreign companies which engage in the sale, rental, exhibition or operation in any manner of the motion picture film business and which have contracts with companies formed to do business in Cuba and with which they make an agreement whereby the foreign companies are to receive a percentage of the revenues obtained in Cuban territory, for the sale, lease, exhibition or otherwise of the films furnished, even though the company formed or which may be formed is a Cuban company. * * *.

The tax on net profits imposed by Chapter VI, Article III, Tariff Fourth, of the Emergency Tax Law of January 29, 1931, as amended, is an income tax by Federal tax standards. Therefore, since the tax imposed by the Emergency Tax Law of January 29, 1931, as amended by the Law of September 23, 1932, for which regulations were issued by Decree No. 2366 of September 25, 1935, on the gross revenues of certain foreign enterprises relieved these entities from the obligation to pay the profits tax at the normal rates and on the normal net income basis provided by the Law of January 29, 1931, as amended, to which tax these entities would otherwise be subject, it is a tax imposed in lieu of an income tax within the meaning of section 903 of the code.

Under Chapter VI, Article III, Tariff Second, of the Emergency Tax Law of January 29, 1931, as amended by Law No. 7, April 5, 1943, taxes are imposed on dividends and on interest received on various types of indebtedness. Section one, Tariff Second, of such law imposes a tax on interest received in Cuba on securities issued by foreign governments, or by mercantile or industrial enterprises who do not have their business in Cuba. Section two imposes a tax on the interest on loans secured by real estate, section three imposes a tax on dividends or interest on bonds, and section four imposes a tax on interest on loans evidenced by documents but not secured by real estate. Regulations for the administration of the tax are provided Decree No. 1117 of May 15, 1939. The law provides that these taxes shall fall primarily upon the recipients of the taxable dividends or interest.

The taxes on dividends have been held to qualify as income taxes under section 131 of the Internal Revenue Code of 1939 and they also qualify as income taxes under section 901 of the 1954 Code. See I.T. 3998, C.B. 1950-51, 64. Since the law contains no definition of interest, as used in the Cuban law, the term is assumed to have the character implicit in the normal use of that term. It is concluded, therefore, that the tax on interest on the various of indebtedness also constitutes a tax on income within the meaning of section 901 of the Code.

Article 52, Chapter X, Law No. 7 of April 5, 1943, amended Tariff Second of Article III of Chapter VI of the Emergency Tax Law of January 29, 1931, by adding thereto a provision which imposed a tax on royalty or compensation for the use of trade marks, patents, processes or any other rights utilized in Cuba. The tax is collected by withholding by the payor, or if the payor fails to withhold, directly from the recipient.

Therefore, since royalties are in Cuban law a form of compensation, whether or not a fixed amount, for a scientific, technical, publishing or advertising use or for exhibit or utilization in business, which is paid to the owner of a right of the above-described type which is protected by law, a tax on royalties constitutes a tax on income within the meaning of section 901 of the Code.

Accordingly, it is held that the taxes imposed by the Republic of Cuba on (1) gross receipts of certain foreign corporations under Chapter VI, Article III, of the Emergency Tax Law of January 29, 1931, as modified by the Law of September 23, 1932, and regulated by Decree No. 2366 of September 25, 1935, in substitution for a tax on net profits; (2) interest and on dividends by Chapter VI, Article III, Tariff Second of the Emergency Tax Law of January 29, 1931, as amended by Law No. 7, of April 5, 1943; and (3) royalties by Chapter VI, Article III, Tariff Second, of the Emergency Tax Law of January 29, 1931, as amended by Article 52, Chapter X, Law No. 7, of April 5, 1943, are income taxes or taxes paid in lieu of income or excess profits taxes within the meaning of section 901 or section 903 of the Code and are allowable as a credit against United States income tax under section 901 of the Code, subject to the limitation provided by section 904 of the Code.