§245A — Title 26 Internal Revenue Code | U.S. Code

Summary

American corporations that are 10-percent shareholders of a foreign corporation can generally receive dividends from that company free of U.S. tax. The corporation deducts the foreign-source portion of the dividend, which is the share tied to earnings the foreign company built up abroad, figured by comparing its undistributed foreign earnings to its total undistributed earnings. In exchange, no foreign tax credit or deduction is allowed for foreign taxes paid on the dividend. The deduction is denied for hybrid dividends, meaning payments the foreign company also got a deduction or other tax benefit for in its own country, so income cannot escape tax in both places. If a hybrid dividend passes between two related foreign companies, the U.S. shareholder must instead report its share as taxable income. The break also does not apply to dividends from passive foreign investment companies that are not controlled foreign corporations.

Title 26, §245A

Internal Revenue Code — Source: USLM XML via OLRC

(a)In the case of any dividend received from a specified 10-percent owned foreign corporation by a domestic corporation which is a United States shareholder with respect to such foreign corporation, there shall be allowed as a deduction an amount equal to the foreign-source portion of such dividend.

(b)For purposes of this section—

(1)The term “specified 10-percent owned foreign corporation” means any foreign corporation with respect to which any domestic corporation is a United States shareholder with respect to such corporation.

(2)Such term shall not include any corporation which is a passive foreign investment company (as defined in section 1297) with respect to the shareholder and which is not a controlled foreign corporation.

(c)For purposes of this section—

(1)The foreign-source portion of any dividend from a specified 10-percent owned foreign corporation is an amount which bears the same ratio to such dividend as—

(A)the undistributed foreign earnings of the specified 10-percent owned foreign corporation, bears to

(B)the total undistributed earnings of such foreign corporation.

(2)The term “undistributed earnings” means the amount of the earnings and profits of the specified 10-percent owned foreign corporation (computed in accordance with section 964(a) and 986)—

(A)as of the close of the taxable year of the specified 10-percent owned foreign corporation in which the dividend is distributed, and

(B)without diminution by reason of dividends distributed during such taxable year.

(3)The term “undistributed foreign earnings” means the portion of the undistributed earnings which is attributable to neither—

(A)income described in subparagraph (A) of section 245(a)(5), nor

(B)dividends described in subparagraph (B) of such section (determined without regard to section 245(a)(12)).

(d)(1)No credit shall be allowed under section 901 for any taxes paid or accrued (or treated as paid or accrued) with respect to any dividend for which a deduction is allowed under this section.

(2)No deduction shall be allowed under this chapter for any tax for which credit is not allowable under section 901 by reason of paragraph (1) (determined by treating the taxpayer as having elected the benefits of subpart A of part III of subchapter N).

(e)(1)Subsection (a) shall not apply to any dividend received by a United States shareholder from a controlled foreign corporation if the dividend is a hybrid dividend.

(2)If a controlled foreign corporation with respect to which a domestic corporation is a United States shareholder receives a hybrid dividend from any other controlled foreign corporation with respect to which such domestic corporation is also a United States shareholder, then, notwithstanding any other provision of this title—

(A)the hybrid dividend shall be treated for purposes of section 951(a)(1)(A) as subpart F income of the receiving controlled foreign corporation for the taxable year of the controlled foreign corporation in which the dividend was received, and

(B)the United States shareholder shall include in gross income an amount equal to the shareholder’s pro rata share (determined in the same manner as under section 951(a)(2)) of the subpart F income described in subparagraph (A).

(3)The rules of subsection (d) shall apply to any hybrid dividend received by, or any amount included under paragraph (2) in the gross income of, a United States shareholder.

(4)The term “hybrid dividend” means an amount received from a controlled foreign corporation—

(A)for which a deduction would be allowed under subsection (a) but for this subsection, and

(B)for which the controlled foreign corporation received a deduction (or other tax benefit) with respect to any income, war profits, or excess profits taxes imposed by any foreign country or possession of the United States.

(f)Any amount which is treated as a dividend under section 1291(d)(2)(B) shall not be treated as a dividend for purposes of this section.

(g)The Secretary shall prescribe such regulations or other guidance as may be necessary or appropriate to carry out the provisions of this section, including regulations for the treatment of United States shareholders owning stock of a specified 10 percent 11 So in original. Probably should be “10-percent”. owned foreign corporation through a partnership.

Notes & Related Subsidiaries

Statutory Notes and Related Subsidiaries

Effective Date

Pub. L. 115–97, title I, § 14101(f), Dec. 22, 2017, 131 Stat. 2192, provided that: “The

Amendments

made by this section [enacting this section and amending section 246, 904, 951, 957, and 1059 of this title] shall apply to distributions made after (and, in the case of the

Amendments

made by subsection (d) [amending section 904 of this title], deductions with respect to taxable years ending after) December 31, 2017.”

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

Summary

Title 26, §245A

Notes & Related Subsidiaries

Statutory Notes and Related Subsidiaries

Effective Date

Amendments

Amendments

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