Rev. Rul. 75-53

Advice has been requested whether South West Africa (Namibia) is a "less developed country" for purposes of section 902(a)(2) of the Internal Revenue Code of 1954 under the circumstances described below.

In 1974, P, a domestic corporation, received a dividend from N, its wholly-owned Namibian subsidiary. The dividend was paid out of accumulated profits of N's taxable years 1973 and 1974. All of N's income is derived from sources within Namibia.

The specific question is whether the dividend paid by N is a dividend received from a "less developed country corporation" under section 902(a)(2) of the Code.

Namibia is an international territory under the supervisory authority of the United Nations. From 1920, when Namibia became an international territory under Article 22 of the Covenant of the League of Nations, until 1966, the Republic of South Africa (South Africa) ruled Namibia on behalf of the League and then on behalf of the United Nations as a mandated territory. On October 27, 1966, the United Nations revoked South Africa's mandate over Namibia and declared any continued occupation of Namibia by South Africa to be illegal. The revocation of the mandate was confirmed by the International Court of Justice in 1971. South Africa has refused to accept the United Nation's decision and continues to exercise jurisdiction and de facto control over Namibia.

In May 1970 the United States announced that it would officially discourage investment by United States nationals and companies in Namibia; that United States nationals who invest in Namibia on the basis of rights acquired through the South African government since October 27, 1966, will not receive United States government assistance in protection of such investments against claims of a future lawful government of the territory; and that Export-Import Bank credit guarantees and other facilities will no longer be available for trade with the territory. The United States has never recognized Namibia as an independent country.

Section 902(a)(2) of the Code provides certain domestic corporate stockholders in less developed country corporations a special method of computing the foreign tax credit with respect to dividends paid by such corporations.

Section 955(c)(1) of the Code, in part, defines less developed country corporations as foreign corporations, a certain percent of the income and assets of which is derived from sources within and are located in less developed countries.

Section 955(c)(3) of the Code provides, in part, that the term less developed country means any foreign country (other than an area within the Sino-Soviet bloc) or any possession of the United States with respect to which, on the first day of the taxable year, there is in effect an Executive Order of the President of the United States designating such country or possession as an economically less developed country. Section 955(c)(3) also provides that no designation shall be made with respect to certain countries enumerated therein.

Section 1(a) of Executive Order 11071, 1963-1 C.B. 137, issued under authority of section 955(c)(3) of the Code, provides, in part, that for purposes of certain sections and subparts of the Code, all foreign countries (including Trust Territories) in existence on or after December 31, 1962, other than the countries listed in section 1(a) of the Executive Order, which include South Africa, are designated as economically less developed countries.

Section 1(b) of Executive Order 11071 provides, in part and in effect, that each territory, department, province, and possession (other than Hong Kong) of any foreign country in existence after December 31, 1962, is designated as an economically less developed country, if the territory, department, province, or possession is overseas from the foreign country of which it is a territory, department, province, or possession.

In the instant case, Namibia was not a "foreign country * * * in existence on or after December 31, 1962," in 1972 within the meaning of section 1(a) of Executive Order 11071. Prior to October 27, 1966, Namibia was a Trust Territory, and as such was an economically less developed country within the meaning of that section. Subsequent to October 27, 1966, Namibia has had no established and independent government and has been ruled as a South African possession not situated overseas from South Africa, and hence, is not an economically less developed country within the meaning of section 1(b) of Executive Order 11071.

Accordingly, for taxable years of foreign corporations beginning after October 27, 1966, Namibia is not a less developed country, as defined in section 955(c)(3) of the Code, for purposes of section 902(a)(2). Thus, since N's dividend to P was not paid out of accumulated profits of taxable years for which N was a less developed country corporation, as defined in section 955(c), P cannot compute its foreign tax credit with respect to such dividend under section 902(a)(2).