US Code

Public Law 119-73 (01/23/2026)

26 U.S.C. § 407

Certain employees of domestic subsidiaries engaged in business outside the United States

(a)

Treatment as employees of domestic parent corporation

(1)

In general

For purposes of applying this part with respect to a pension, profit-sharing, or stock bonus plan described in section 401(a) or an annuity plan described in section 403(a), of a domestic parent corporation, an individual who is a citizen or resident of the United States and who is an employee of a domestic subsidiary (within the meaning of paragraph (2)) of such domestic parent corporation shall be treated as an employee of such domestic parent corporation, if—
(A)
the plan of such domestic parent corporation expressly provides for contributions or benefits for individuals who are citizens or residents of the United States and who are employees of its domestic subsidiaries; and
(B)
contributions under a funded plan of deferred compensation (whether or not a plan described in section 401(a) or 403(a)) are not provided by any other person with respect to the remuneration paid to such individual by the domestic subsidiary.
(2)

Definitions

For purposes of this section—
(A)

Domestic subsidiary

A corporation shall be treated as a domestic subsidiary for any taxable year only if—
(i)
such corporation is a domestic corporation 80 percent or more of the outstanding voting stock of which is owned by another domestic corporation;
(ii)
95 percent or more of its gross income for the three-year period immediately preceding the close of its taxable year which ends on or before the close of the taxable year of such other domestic corporation (or for such part of such period during which the corporation was in existence), was derived from sources without the United States; and
(iii)
90 percent or more of its gross income for such period (or such part) was derived from the active conduct of a trade or business.
If for the period (or part thereof) referred to in clauses (ii) and (iii) such corporation has no gross income, the provisions of clauses (ii) and (iii) shall be treated as satisfied if it is reasonable to anticipate that, with respect to the first taxable year thereafter for which such corporation has gross income, the provisions of such clauses will be satisfied.
(B)

Domestic parent corporation

The domestic parent corporation of any domestic subsidiary is the domestic corporation which owns 80 percent or more of the outstanding voting stock of such domestic subsidiary.

(b)

Special rules for application of section 401(a)

(1)

Nondiscrimination requirements

For purposes of applying section 401(a)(4) and section 410(b) with respect to an individual who is treated as an employee of a domestic parent corporation under subsection (a)—
(A)
if such individual is a highly compensated employee (within the meaning of section 414(q)), he shall be treated as having such capacity with respect to such domestic parent corporation; and
(B)
the determination of whether such individual is a highly compensated employee (as so defined) shall be made by treating such individual’s total compensation (determined with the application of paragraph (2) of this subsection) as compensation paid by such domestic parent corporation and by determining such individual’s status with regard to such domestic parent corporation.
(2)

Determination of compensation

For purposes of applying paragraph (5) of section 401(a) with respect to an individual who is treated as an employee of a domestic parent corporation under subsection (a), the total compensation of such individual shall be the remuneration paid to such individual by the domestic subsidiary which would constitute his total compensation if his services had been performed for such domestic parent corporation, and the basic or regular rate of compensation of such individual shall be determined under regulations prescribed by the Secretary.

[(c)

Pub. L. 104–188, title I, § 1401(b)(8)110 Stat. 1789 Repealed. , , ]

(d)

Deductibility of contributions

For purposes of applying section 404 with respect to contributions made to or under a pension, profit-sharing, stock bonus, or annuity plan by a domestic parent corporation, or by another corporation which is entitled to deduct its contributions under section 404(a)(3)(B), on behalf of an individual who is treated as an employee of such domestic corporation under subsection (a)—
(1)
except as provided in paragraph (2), no deduction shall be allowed to such domestic parent corporation or to any other corporation which is entitled to deduct its contributions under such sections,
(2)
there shall be allowed as a deduction to the domestic subsidiary of which such individual is an employee an amount equal to the amount which (but for paragraph (1)) would be deductible under section 404 by the domestic parent corporation if he were an employee of the domestic parent corporation, and
(3)
any reference to compensation shall be considered to be a reference to the total compensation of such individual (determined with the application of subsection (b)(2)).
Any amount deductible by a domestic subsidiary under this subsection shall be deductible for its taxable year with or within which the taxable year of such domestic parent corporation ends.
(e)

Treatment as employee under related provisions

An individual who is treated as an employee of a domestic parent corporation under subsection (a) shall also be treated as an employee of such domestic parent corporation, with respect to the plan described in subsection (a)(1)(A), for purposes of applying the following provisions of this title:
(1)
Section 72(f) (relating to special rules for computing employees’ contributions).
(2)
Section 2039 (relating to annuities).

Pub. L. 88–272, title II, § 220(b)78 Stat. 60Pub. L. 91–172, title V, § 515(c)(3)83 Stat. 646Pub. L. 93–406, title II88 Stat. 929Pub. L. 94–455, title XIX, § 1906(b)(13)(A)90 Stat. 1834Pub. L. 98–21, title III, § 321(d)97 Stat. 119Pub. L. 98–369, div. A, title IV, § 491(d)(16)98 Stat. 850Pub. L. 99–514, title XI100 Stat. 2445Pub. L. 100–647, title I, § 1011A(b)(1)(C)102 Stat. 3472Pub. L. 101–239, title VII103 Stat. 2409Pub. L. 102–318, title V, § 521(b)(15)106 Stat. 311Pub. L. 104–188, title I110 Stat. 1789(Added , , ; amended , , ; , §§ 1016(a)(5), 2005(c)(13), , , 992; , , ; , , ; –(18), , ; , §§ 1112(d)(3), 1114(b)(9)(B), (C), title XVIII, § 1852(e)(2)(D), , , 2451, 2868; , (16), , , 3475; , §§ 7811(g)(3), 7831(f), , , 2427; , , ; , §§ 1401(b)(8), 1402(b)(2), , , 1790.)

Editorial Notes

Amendments

Pub. L. 104–188, § 1401(b)(8)1996—Subsec. (c). , struck out subsec. (c) which related to treatment of termination of status as deemed employee.

Pub. L. 104–188, § 1402(b)(2)Subsec. (e)(2), (3). , redesignated par. (3) as (2) and struck out former par. (2) which read as follows: “Section 101(b) (relating to employees’ death benefits).”

Pub. L. 102–3181992—Subsec. (c). substituted “402(d)” for “402(e)”.

Pub. L. 101–239, § 7831(f)Pub. L. 99–514, § 1114(b)(9)(B)1989—Subsec. (b)(1)(A). , made technical correction to , see 1986 Amendment note below.

Pub. L. 101–239, § 7811(g)(3)Subsec. (c). , substituted “purposes of limitation” for “purposes limitation” in heading.

Pub. L. 100–647, § 1011A(b)(16)1988—Subsec. (c). , struck out “of capital gain provisions and” after “service for purposes” in heading and substituted “applying section 402(e)” for “applying subsections (a)(2) and (e) of section 402, and section 403(a)(2)” in text.

Pub. L. 100–647, § 1011A(b)(1)(C)Subsec. (e). , redesignated pars. (2) to (4) as (1) to (3), respectively, and struck out former par. (1) which read as follows: “Section 72(d) (relating to employees’ annuities).”

Pub. L. 99–514, § 1112(d)(3)1986—Subsec. (b)(1). , struck out “(without regard to paragraph (1)(A) thereof)” after “section 410(b)” in introductory text.

Pub. L. 99–514, § 1114(b)(9)(B)Pub. L. 101–239, § 7831(f)Subsec. (b)(1)(A). , as amended by , substituted “a highly compensated employee (within the meaning of section 414(q))” for “an officer, shareholder, or person whose principal duties consist in supervising the work of other employees of a domestic subsidiary”.

Pub. L. 99–514, § 1114(b)(9)(C)Subsec. (b)(1)(B). , inserted “(as so defined)” after “employee”.

Pub. L. 99–514, § 1852(e)(2)(D)Subsec. (e)(5). , struck out par. (5) which read as follows: “Section 2517 (relating to certain annuities under qualified plans).”

Pub. L. 98–369, § 491(d)(16)1984—Subsec. (a)(1). , substituted “or an annuity plan described in section 403(a)” for “, an annuity plan described in section 403(a), or a bond purchase plan described in section 405(a)”.

Pub. L. 98–369, § 491(d)(17)Subsec. (a)(1)(B). , substituted “or 403(a)” for “, 403(a), or 405(a)”.

Pub. L. 98–369, § 491(d)(18)(A)Subsec. (d). , (B), substituted in introductory provision “section 404” for “sections 404 and 405(a)”, and “or annuity” for “annuity, or bond purchase”.

Pub. L. 98–369, § 491(d)(18)(C)Subsec. (d)(2). , struck out “(or section 405(c))” after “section 404”.

Pub. L. 98–211983—Subsec. (a)(1). inserted “or resident” after “citizen”, and inserted “or residents” after “citizens” in subpar. (A).

Pub. L. 94–4551976—Subsec. (b)(2). struck out “or his delegate” after “Secretary”.

Pub. L. 93–406, § 1016(a)(5)1974—Subsec. (b)(1). , substituted “section 401(a)(4) and section 410(b) (without regard to paragraph (1)(A) thereof)” for “paragraphs (3)(B) and (4) of section 401(a)”.

Pub. L. 93–406, § 2005(c)(13)Subsec. (c). , substituted “subsections (a)(2) and (e) of section 402” for “section 72(n), section 402(a)(2)”.

Pub. L. 91–1721969—Subsec. (c). substituted “provisions and limitation of tax” for “provisions” in heading, and substituted “section 72(n), section 402(a)(2),” for “section 402(a)(2)” in text.

Statutory Notes and Related Subsidiaries

Effective Date of 1996 Amendment

section 1401(b)(8) of Pub. L. 104–188section 1401(c) of Pub. L. 104–188section 402 of this titleAmendment by applicable to taxable years beginning after , with retention of certain transition rules, see , set out as a note under .

section 1402(b)(2) of Pub. L. 104–188section 1402(c) of Pub. L. 104–188section 101 of this titleAmendment by applicable with respect to decedents dying after , see , set out as a note under .

Effective Date of 1992 Amendment

Pub. L. 102–318section 521(e) of Pub. L. 102–318section 402 of this titleAmendment by applicable to distributions after , see , set out as a note under .

Effective Date of 1989 Amendment

section 7811(g)(3) of Pub. L. 101–239Pub. L. 100–647section 7817 of Pub. L. 101–239section 1 of this titleAmendment by effective, except as otherwise provided, as if included in the provision of the Technical and Miscellaneous Revenue Act of 1988, , to which such amendment relates, see , set out as a note under .

section 7831(f) of Pub. L. 101–239Pub. L. 99–514section 7831(g) of Pub. L. 101–239section 1 of this titleAmendment by effective as if included in the provision of the Tax Reform Act of 1986, , to which such amendment relates, see , set out as a note under .

Effective Date of 1988 Amendment

Pub. L. 100–647Pub. L. 99–514section 1019(a) of Pub. L. 100–647section 1 of this titleAmendment by effective, except as otherwise provided, as if included in the provision of the Tax Reform Act of 1986, , to which such amendment relates, see , set out as a note under .

Effective Date of 1986 Amendment

section 1112(d)(3) of Pub. L. 99–514section 1112(e) of Pub. L. 99–514section 401 of this titleAmendment by applicable to plan years beginning after , with special rule regarding collective bargaining agreements ratified before , and with provision for waiver of excise tax on reversions, see , set out as a note under .

Pub. L. 99–514section 1114(c)(3) of Pub. L. 99–514section 414 of this titleAmendment by section 1114(b)(9)(B), (C) of applicable to years beginning after , see , set out as a note under .

section 1852(e)(2)(D) of Pub. L. 99–514section 1852(e)(2)(E) of Pub. L. 99–514section 406 of this titleAmendment by applicable to transfers after , see , set out as a note under .

Effective Date of 1984 Amendment

Pub. L. 98–369section 491(f)(1) of Pub. L. 98–369section 62 of this titleAmendment by applicable to obligations issued after , see , set out as a note under .

Effective Date of 1983 Amendment

Pub. L. 98–21section 321(f) of Pub. L. 98–21section 406 of this titleAmendment by applicable to plans established after , except that at the election of any domestic parent corporation such amendment shall also apply to any plan established on or before , see set out as a note under .

Effective Date of 1974 Amendment

section 1016(a)(5) of Pub. L. 93–406Pub. L. 93–406Pub. L. 93–406section 1017 of Pub. L. 93–406section 410 of this titleAmendment by applicable, except as otherwise provided in section 1017(c) through (i) of , for plan years beginning after , but, in the case of plans in existence on , amendment by applicable for plan years beginning after , see , set out as an Effective Date; Transitional Rules note under .

section 2005(c)(13) of Pub. L. 93–406section 2005(d) of Pub. L. 93–406section 402 of this titleAmendment by applicable only with respect to distributions or payments made after , in taxable years beginning after , see , set out as a note under .

Effective Date of 1969 Amendment

Pub. L. 91–172section 515(d) of Pub. L. 91–172section 402 of this titleAmendment by applicable to taxable years ending after , see , set out as a note under .

Effective Date

section 220(d) of Pub. L. 88–272section 406 of this titleSection applicable to taxable years ending after , see , set out as a note under .

Regulations

Pub. L. 99–514section 1141 of Pub. L. 99–514section 401 of this titleSecretary of the Treasury or his delegate to issue before , final regulations to carry out amendments made by sections 1112 and 1114 of , see , set out as a note under .

Plan Amendments Not Required Until January 1, 1998

Pub. L. 104–188section 1465 of Pub. L. 104–188section 401 of this titleFor provisions directing that if any amendments made by subtitle D [§§ 1401–1465] of title I of require an amendment to any plan or annuity contract, such amendment shall not be required to be made before the first day of the first plan year beginning on or after , see , set out as a note under .

Plan Amendments Not Required Until January 1, 1994

Pub. L. 102–318section 523 of Pub. L. 102–318section 401 of this titleFor provisions directing that if any amendments made by subtitle B [§§ 521–523] of title V of require an amendment to any plan, such plan amendment shall not be required to be made before the first plan year beginning on or after , see , set out as a note under .

Plan Amendments Not Required Until January 1, 1989

Pub. L. 99–514section 1140 of Pub. L. 99–514section 401 of this titleFor provisions directing that if any amendments made by subtitle A or subtitle C of title XI [§§ 1101–1147 and 1171–1177] or title XVIII [§§ 1800–1899A] of require an amendment to any plan, such plan amendment shall not be required to be made before the first plan year beginning on or after , see , as amended, set out as a note under .