26 USC 245 - Dividends received from certain foreign corporations

United States Code

USC most recently checked for updates: Apr 20, 2025

§ 245A. Deduction for foreign source-portion of dividends received by domestic corporations from specified 10-percent owned foreign corporations

U.S. Code
Notes

§ 245.

Dividends received from certain foreign corporations

(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.

(c)

Certain dividends received from FSC

(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.

(C)

FSC

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.

(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.)

cite as: 26 USC 245