26 U.S.C. § 245 — Dividends received from certain foreign corporations

submitted 72 years ago by ch. 736 to r/title-26-INTERNAL-REVENUE-CODE · 1,251 words · no verdicts yet

in plain englishAI-generated · not legal advice

A corporation can deduct part of dividends it gets from a foreign company it owns at least 10% of, based on the U.S.-connected share of that company's earnings. If it owns 100% of the foreign company, it can deduct the whole dividend. Special, smaller deductions apply to dividends tied to old foreign sales corporations.

(a) Dividends from 10-percent owned foreign corporations. If a domestic corporation receives a dividend from a "qualified 10-percent owned foreign corporation" — a foreign corporation, other than a passive foreign investment company, in which the taxpayer owns at least 10% of the stock by vote and value — the corporation can deduct part of that dividend. The deductible percentage is the same percentage that section 243 sets for that year, applied only to the "U.S.-source portion" of the dividend. The U.S.-source portion is a fraction of the dividend: it's the dividend multiplied by the foreign corporation's "post-1986 undistributed U.S. earnings" divided by its total "post-1986 undistributed earnings." Post-1986 undistributed earnings means the foreign corporation's earnings and profits (figured under sections 964(a) and 986) built up in years starting after December 31, 1986, measured as of the end of the year the dividend is paid, without subtracting that year's dividend payments. The "U.S." share of those earnings is the part that comes from either income effectively connected with, and taxed on, a U.S. trade or business, or from a dividend the foreign corporation received (directly or through another wholly owned foreign corporation) from a domestic corporation it owns at least 80% of. If a foreign corporation first became a qualified 10-percent owned foreign corporation in a tax year starting after December 31, 1986, only earnings from that point forward count. These earnings aren't counted here if the 100% deduction in subsection (b) would apply to dividends from them instead. No foreign tax credit under section 901 is allowed for taxes paid on the U.S.-source portion of these dividends. For purposes of section 904 (the foreign tax credit limit), that U.S.-source portion is treated as U.S.-source income — though if a tax treaty would instead treat it as foreign-source, and the taxpayer chooses to use the treaty rule, this subsection doesn't apply to that dividend, and sections 904, 907, and 960 apply separately to it. The word "dividend" here doesn't include amounts treated as a dividend under section 1248. And regulated investment companies and real estate investment trusts don't count as "domestic corporations" for the 80%-ownership test above. (b) Certain dividends received from wholly owned foreign subsidiaries. If a domestic corporation owns, directly or indirectly, all the stock of a foreign corporation, and the foreign corporation's entire gross income for that year is effectively connected with a U.S. trade or business, the domestic corporation can deduct 100% of dividends from that foreign corporation — instead of using subsection (a)'s deduction. This 100% deduction doesn't apply, though, if a section 1562 election is in effect for either company's tax year involved. (c) Certain dividends received from FSC. A domestic corporation can deduct 100% of a dividend paid out of earnings the payor built up as a Foreign Sales Corporation (FSC) from its foreign trade income. It can deduct 50% (or 65%, if the payor is a 20-percent owned corporation as defined in section 243(c)(2)) of a dividend paid out of earnings the payor built up as a FSC from effectively connected income. These deductions don't apply to dividends from foreign trade income that counts as "nonexempt income" under section 923(a)(2), or that would only count as exempt foreign trade income because of section 923(a)(4). And no deduction under subsection (a) or (b) is allowed for dividends paid from earnings a corporation built up while it was a FSC. "Foreign trade income" and "exempt foreign trade income" mean what section 923 says; "effectively connected income" means income connected with, and taxed on, a U.S. trade or business, not including foreign trade income; and "FSC" means what section 922 says. Since sections 922, 923, and 927 were repealed by the FSC Repeal and Extraterritorial Income Exclusion Act of 2000, references to them here mean those sections as they existed before that repeal.

the actual law source: uscode.house.gov ↗public domain

(a) Dividends from 10-percent owned foreign corporations

(1) In general

In the case of dividends received by a corporation from a qualified 10-percent owned foreign corporation, there shall be allowed as a deduction an amount equal to the percent (specified in section 243 for the taxable year) of the U.S.-source portion of such dividends.

(2) Qualified 10-percent owned foreign corporation

For purposes of this subsection, the term “qualified 10-percent owned foreign corporation” means any foreign corporation (other than a passive foreign investment company) if at least 10 percent of the stock of such corporation (by vote and value) is owned by the taxpayer.

(3) U.S.-source portion

For purposes of this subsection, the U.S.-source portion of any dividend is an amount which bears the same ratio to such dividend as—

(A)

the post-1986 undistributed U.S. earnings, bears to

(B)

the total post-1986 undistributed earnings.

(4) Post-1986 undistributed earnings

The term “post-1986 undistributed earnings” means the amount of the earnings and profits of the foreign corporation (computed in accordance with sections 964(a) and 986) accumulated in taxable years beginning after December 31, 1986—

(A)

as of the close of the taxable year of the foreign corporation in which the dividend is distributed, and

(B)

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

(5) Post-1986 undistributed U.S. earnings

For purposes of this subsection, the term “post-1986 undistributed U.S. earnings” means the portion of the post-1986 undistributed earnings which is attributable to—

(A)

income of the qualified 10-percent owned foreign corporation which is effectively connected with the conduct of a trade or business within the United States and subject to tax under this chapter, or

(B)

any dividend received (directly or through a wholly owned foreign corporation) from a domestic corporation at least 80 percent of the stock of which (by vote and value) is owned (directly or through such wholly owned foreign corporation) by the qualified 10-percent owned foreign corporation.

(6) Special rule

If the 1st day on which the requirements of paragraph (2) are met with respect to any foreign corporation is in a taxable year of such corporation beginning after December 31, 1986, the post-1986 undistributed earnings and the post-1986 undistributed U.S. earnings of such corporation shall be determined by only taking into account periods beginning on and after the 1st day of the 1st taxable year in which such requirements are met.

(7) Coordination with subsection (b)

Earnings and profits of any qualified 10-percent owned foreign corporation for any taxable year shall not be taken into account under this subsection if the deduction provided by subsection (b) would be allowable with respect to dividends paid out of such earnings and profits.

(8) Disallowance of foreign tax credit

No credit shall be allowed under section 901 for any taxes paid or accrued (or treated as paid or accrued) with respect to the United States-source portion of any dividend received by a corporation from a qualified 10-percent-owned foreign corporation.

(9) Coordination with section 904

For purposes of section 904, the U.S.-source portion of any dividend received by a corporation from a qualified 10-percent owned foreign corporation shall be treated as from sources in the United States.

(10) Coordination with treaties

If—

(A)

any portion of a dividend received by a corporation from a qualified 10-percent-owned foreign corporation would be treated as from sources in the United States under paragraph (9),

(B)

under a treaty obligation of the United States (applied without regard to this subsection), such portion would be treated as arising from sources outside the United States, and

(C)

the taxpayer chooses the benefits of this paragraph,

this subsection shall not apply to such dividend (but subsections (a), (b), and (c) of section 904 and sections 907 and 960 shall be applied separately with respect to such portion of such dividend).

(11) Coordination with section 1248

For purposes of this subsection, the term “dividend” does not include any amount treated as a dividend under section 1248.

(12) Dividends derived from RICs and REITs ineligible for deduction

Regulated investment companies and real estate investment trusts shall not be treated as domestic corporations for purposes of paragraph (5)(B).

(b) Certain dividends received from wholly owned foreign subsidiaries

(1) In general

In the case of dividends described in paragraph (2) received from a foreign corporation by a domestic corporation which, for its taxable year in which such dividends are received, owns (directly or indirectly) all of the outstanding stock of such foreign corporation, there shall be allowed as a deduction (in lieu of the deduction provided by subsection (a)) an amount equal to 100 percent of such dividends.

(2) Eligible dividends

Paragraph (1) shall apply only to dividends which are paid out of the earnings and profits of a foreign corporation for a taxable year during which—

(A)

all of its outstanding stock is owned (directly or indirectly) by the domestic corporation to which such dividends are paid; and

(B)

all of its gross income from all sources is effectively connected with the conduct of a trade or business within the United States.

(3) Exception

Paragraph (1) shall not apply to any dividends if an election under section 1562 is effective for either—

(A)

the taxable year of the domestic corporation in which such dividends are received, or

(B)

the taxable year of the foreign corporation out of the earnings and profits of which such dividends are paid.

(1) In general

In the case of a domestic corporation, there shall be allowed as a deduction an amount equal to—

(A)

100 percent of any dividend received from another corporation which is distributed out of earnings and profits attributable to foreign trade income for a period during which such other corporation was a FSC, and

(B)

50 percent (65 percent in the case of dividends from a 20-percent owned corporation as defined in section 243(c)(2)) of any dividend received from another corporation which is distributed out of earnings and profits attributable to effectively connected income received or accrued by such other corporation while such other corporation was a FSC.

(2) Exception for certain dividends

Paragraph (1) shall not apply to any dividend which is distributed out of earnings and profits attributable to foreign trade income which—

(A)

is section 923(a)(2) nonexempt income (within the meaning of section 927(d)(6)), or

(B)

would not, but for section 923(a)(4), be treated as exempt foreign trade income.

(3) No deduction under subsection (a) or (b)

No deduction shall be allowable under subsection (a) or (b) with respect to any dividend which is distributed out of earnings and profits of a corporation accumulated while such corporation was a FSC.

(4) Definitions

For purposes of this subsection—

(A) Foreign trade income; exempt foreign trade income

The terms “foreign trade income” and “exempt foreign trade income” have the respective meanings given such terms by section 923.

(B) Effectively connected income

The term “effectively connected income” means any income which is effectively connected (or treated as effectively connected) with the conduct of a trade or business in the United States and is subject to tax under this chapter. Such term shall not include any foreign trade income.

The term “FSC” has the meaning given such term by section 922.

(5) References to prior law

Any reference in this subsection to section 922, 923, or 927 shall be treated as a reference to such section as in effect before its repeal by the FSC Repeal and Extraterritorial Income Exclusion Act of 2000.

Source credit: (Aug. 16, 1954, ch. 736, 68A Stat. 73; Pub. L. 87–834, § 5(c), Oct. 16, 1962, 76 Stat. 977; Pub. L. 89–809, title I, § 104(d), (e), Nov. 13, 1966, 80 Stat. 1558; Pub. L. 98–369, div. A, title VIII, § 801(b)(1), (2)(B), July 18, 1984, 98 Stat. 994, 995; Pub. L. 99–514, title XII, § 1226(a), title XVIII, § 1876(d)(1), (j), Oct. 22, 1986, 100 Stat. 2559, 2898, 2900; Pub. L. 100–203, title X, § 10221(d)(1), Dec. 22, 1987, 101 Stat. 1330–409; Pub. L. 100–647, title I, §§ 1006(e)(16), 1012(l)(2), (3), (bb)(9)(A), Nov. 10, 1988, 102 Stat. 3403, 3513, 3537; Pub. L. 101–239, title VII, § 7811(i)(14), Dec. 19, 1989, 103 Stat. 2411; Pub. L. 108–357, title IV, § 413(c)(3), Oct. 22, 2004, 118 Stat. 1507; Pub. L. 110–172, § 11(g)(3), (4), Dec. 29, 2007, 121 Stat. 2490; Pub. L. 114–113, div. Q, title III, § 326(a), Dec. 18, 2015, 129 Stat. 3103; Pub. L. 115–97, title I, §§ 13002(b), 14301(c)(2), (3), Dec. 22, 2017, 131 Stat. 2100, 2222.)

history & why it existsrecord from the source credit

1954Enacted · Act of Aug. 16, 1954, ch. 736
1962Amended · Pub. L. 87-834 · 76 Stat. 977
1966Amended · Pub. L. 89-809 · 80 Stat. 1558
1984Amended · Pub. L. 98-369 · 98 Stat. 994, 995
1986Amended · Pub. L. 99-514 · 100 Stat. 2559, 2898, 2900
1987Amended · Pub. L. 100-203 · 101 Stat. 1330
1988Amended · Pub. L. 100-647 · 102 Stat. 3403, 3513, 3537
1989Amended · Pub. L. 101-239 · 103 Stat. 2411
2004Amended · Pub. L. 108-357 · 118 Stat. 1507
2007Amended · Pub. L. 110-172 · 121 Stat. 2490
2015Amended · Pub. L. 114-113 · 129 Stat. 3103
2017Amended · Pub. L. 115-97 · 131 Stat. 2100, 2222

A history note hasn’t been published yet. The record shows enactment by ch. 736 on 1954-08-16.

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