February 2018 JD Supra
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Did you know that the “Act” has a Deduction for Dividends Received (DRD)? – JD Supra.

The “Tax Cuts and Jobs Act” (the “Act”) has a stated purpose of converting the U.S. to a “territorial” tax system.  Before the Act was approved, most U.S. companies were incentivized to keep their earnings offshore.  In the transition to becoming a territorial tax system, the ACT provides certain incentives and one of them is the DRD. 

Before the Act, a U.S. Corporate Shareholder that owned 10% or more of a foreign corporation and received   dividends from that foreign corporation had to treat the dividends as gains and pay taxes accordingly. Moreover, that U.S. Corporate Shareholder could claim a foreign tax credit (or a deduction) relating to the foreign income taxes withheld from the dividend income.  Thus, the Corporate Taxpayer had an indirect foreign tax credit. 

In order to reduce the incentives for U.S. companies to “warehouse”  their earnings offshore, the Act provides a Deduction for Dividends Received (DRD) for certain foreign income. The DRD deduction under the Act states that:

  • The DRD is only available to U.S. Corporations and not Individuals.
  • U.S. Corporate shareholders can claim a 100% DRD deduction for the foreign-source portion of dividends attributable to a 10%-ownership in a specified foreign corporation.
  • A specified 10%-owned foreign corporation is any foreign corporation (other than a Passive Foreign Investment Company (PFIC)) – that is not also a Controlled Foreign Corporation (CFC) with respect to which any U.S. domestic corporation is a U.S. shareholder.
  • There will be no foreign tax credit allowed for taxes paid or accrued for dividends that qualify for the DRD.
  • The DRD is disallowed if the stock of the offshore corporation on which it is based is held for less than 180 days.
  • The 100% deduction applies to the distributions made after December 31, 2017.

The DRD deduction should be welcomed by Corporate Taxpayers that have a 10% ownership in a specified foreign corporation.  Corporate Taxpayers should not be victims of their own making and should consult their tax specialist in order to take advantage of the DRD deduction.