Rev. Rul. 59-192

Advice has been requested whether the Cuban taxes imposed under Article 2(b) of Law Decree No. 1005 of July 26, 1953, known as the Rural Housing Tax, which were paid by a Cuban sugar company may be claimed as a foreign tax credit for Federal income tax purposes by a company incorporated under the laws of the United States which owned the entire voting stock of the Cuban company.

A translation of Article 2(b) of Law Decree No. 1005, supra, which imposes the tax under consideration, reads as follows:

A National Tax consisting of an addition on the net rental of the rural properties wherein mills manufacturing sugar, syrups and invert molasses are located, which is established as the basic rental for the collection of the Public Works Law tax, according to the rules contained in Decree number 4050 of September 9, 1949, referred to in Law Decree No. 118 of 1952; said addition comprising 4% on the item of "owned cane" and 2% on the item of "cane owned by others," which is to be paid in the respective Tax Office at the same time as the quotas of the national tax created by Law of July 15, 1925 (Article XVIII, paragraph b), as amended by Article 59 of Law number 7 of April 5, 1943 ("Ampliacion Tributaria"), the collection of which shall be undertaken directly by the Government through its tax offices, independently from the aforementioned Public Works Law tax.

Decree No. 4050 of September 9, 1949, provides in part that the value to be considered as net rental or proceeds shall be the price of a cartload of 100 arrobas of cane ground at the mill in the crop preceding the tax year (such price being obtained by multiplying the average price of a pound of sugar for the three-year period preceding the crop being liquidated by the average number of pounds paid by the mill for each 100 arrobas of cane ground in that crop) multiplied by the number of cartloads of cane classified as "owned," and from this total 80 percent shall be deducted for cultivation and processing expenses. To that net taxable amount shall be added the one resulting from cane classified as "owned by others," obtained by multiplying the same price of the cartload of cane by the number of cartloads of cane of that classification, deducting from the result thereof 60 percent for processing expenses.

In order for a tax paid to a foreign country to be allowable as a credit against United States income tax under section 901 of the Internal Revenue Code of 1954, it must be shown that the tax imposed by the foreign law is a tax on income within the United States concept thereof, or is a tax paid in lieu of income tax under section 903 of the Code. See Rev. Rul. 56-658, C. B. 1956-2, 501, at 502.

The Cuban tax here involved is based on "net income" computed under the identical formula used for computing the statutory net income for the National Tax (Law of July 15, 1925, increased in rate by Law No. 7 of April 5, 1943). This National Tax was held to be an income tax within the meaning of sections 901 and 902 or the 1954 Code. See Rev. Rul. 56-658, supra.

Accordingly, it is held that Cuban taxes imposed under Article 2(b) of Law Decree No. 1005 of July 26, 1953 (Rural Housing Tax) constitute income taxes for which a credit is allowable under sections 901 and 902 of the Code.