Does a US company with one foreign branch file Form 1118?
The test is whether foreign source income sits in the US tax base and foreign income tax was paid or accrued on it, not how many entities the group has. A branch is not a separate taxpayer, so its results are already inside the corporation's own return and the foreign tax on them is claimed on Form 1118 with that return. One branch is enough to bring the whole computation into play: the branch's income still has to be assigned to a category, and the corporation's own expenses still have to be apportioned against it.
Is Form 1118 just the corporate version of Form 1116?
They relieve the same double taxation and they are not interchangeable. Form 1116 is the individual claim, and our page on the individual foreign tax credit sets out how that one works. The corporate claim carries computations the individual form has no counterpart for, chiefly the deemed-paid credit for tax a foreign subsidiary itself paid on earnings that later enter the parent's tax base. A shareholder who also files personally cannot read one across to the other.
Do we still file if no credit is usable this year?
Usually yes, and the reason is the carryover. The limitation can reduce the credit you may take this year to nothing while leaving the foreign tax itself intact as an amount available to a later year. The computation filed with the return is what establishes that amount and puts it on record. Skip it, and the opening position for the next profitable year has to be rebuilt from foreign assessments years after the event, which is slower and weaker than simply having filed.
Should we deduct the foreign tax rather than claim the credit?
They work differently and the comparison has to be run on your own figures. A deduction reduces the income the US tax is computed on; a credit reduces the US tax itself, but only up to the limitation for the category the income falls into. The second difference matters more over time: a credit you cannot use this year survives as a carryover, while a deduction is spent in the year it is taken. We model both before the return is signed rather than after.
Why is our credit smaller than the foreign tax we actually paid?
Almost always apportionment rather than rates. The limitation is computed on foreign source taxable income, so US-incurred costs that relate to earning it — interest, stewardship, research — are apportioned against that income and shrink the figure the limitation is built on. Categories do the rest: foreign tax in one basket cannot shelter US tax on income in another. That is how two groups with identical foreign tax bills end up with very different usable credits, and it is where the work on this form actually goes.
Which taxes on our foreign subsidiary's profits can the parent claim?
Two separate layers, and they are proved differently. Tax the subsidiary paid on its own profits can be treated as paid by the US parent when those earnings are brought into the parent's tax base — that is the deemed-paid credit, and it needs the subsidiary's earnings and its tax history reconstructed, not just a copy of one year's assessment. Withholding deducted at source when the money is distributed is the other layer, evidenced by the payment records. Both are claimed on Form 1118; neither is assumed.
Which country do I pay tax to first?
Generally the source country — where the income arises — taxes first, often by withholding before you receive it. Your country of residence then taxes the same income and credits what the source country took. That order is why timing matters: a residence-country return filed before the source-country tax is settled has nothing to credit yet. Getting the sequence right is most of the work. See international tax planning.
How do you avoid double taxation?
You claim relief once, in the right country, in the right order. Usually the source country taxes first, the residence country then gives a credit for that tax against its own charge on the same income, and a treaty caps the source-country rate. Getting the order wrong is what produces a double charge you then have to unwind. The mechanism differs by income type, which is why we map the whole position before filing either return. See how to avoid double taxation.
