§245A Deduction for Foreign Source-portion of Dividends Received by Domestic Corporations From Specified 10-percent Owned Foreign Corporations

Summary

Allows a U.S. corporation to deduct the foreign part of a dividend it gets from a foreign company tied to a U.S. shareholder (a “specified 10-percent owned foreign corporation”). A passive foreign investment company (PFIC) that is not a controlled foreign corporation (CFC) is excluded. The “foreign-source portion” of a dividend is the share of the dividend that matches the ratio of the foreign company’s undistributed foreign earnings to its total undistributed earnings. Undistributed earnings means the company’s earnings and profits at the end of its tax year, not reduced by dividends that year. Undistributed foreign earnings means the part of those undistributed earnings that is not from certain types of income or dividends listed in the tax code. No foreign tax credit is allowed for taxes tied to dividends that get this deduction, and no deduction is allowed for taxes that can’t get that credit. Dividends that are “hybrid” (where the payer got a foreign tax benefit) are not eligible for this deduction; if one CFC gets a hybrid dividend from another CFC, that amount is treated as subpart F income for the receiving company and taxed to the U.S. shareholder. Amounts treated as dividends under PFIC purge rules are excluded. The Treasury will issue rules, including for ownership through partnerships.