Question

For 2016, Foreign company (FC) had $150 of effectively connected E&P (ECEP) and its US net equity decreased from $1600 at the beginning of the year to $1500 at the end. For 2017, FC had $225 of ECEP and its US net equity decreases by $300 from $1600 at the beginning of the year to $1300 at the end. What is FC's DEA amount for 2018 and its branch profits tax, if any, for 2018?

Answer 1

As per 26 CFR 1.884-1 - Branch profits tax,

(1)The term “dividend equivalent amount” means a foreign corporation's effectively connected earnings and profits (“ECEP”, as defined in paragraph (f)(1) of this section) for the taxable year, adjusted pursuant to paragraph (b) (2) or (3) of this section, as applicable. The dividend equivalentamount cannot be less than zero.

(2)Adjustment for increase in U.S. net equity. If a foreign corporation's U.S. net equity (as defined inparagraph (c) of this section) as of the close of the taxable year exceeds the foreign corporation's U.S. net equity as of the close of the preceding taxable year, then, for purposes of computing the foreign corporation's dividend equivalent amount for the taxable year, the foreign corporation's ECEP for thetaxable year shall be reduced (but not below zero) by the amount of such excess.

Accordingly, DEA for 2018 would be $ 225 + $ 300 = $ 525. Branch profit tax is 30% of DEA, therefore, BPT would be 30% of $ 525 = $ 157.50

Source: https://www.law.cornell.edu/cfr/text/26/1.884-1