Contact: Anna K. Derewenda
Perhaps some of the most extensive changes in H.R. 1, known as the Tax Cuts and Jobs Act (the “Act”), deal with the taxation of multinational companies. The taxation of foreign earnings has long been a point of contention between taxpayers and Congress. The rules reflect a new policy approach to the income of multinationals, as well as carrots and sticks for certain types of activities.
Due to the significant nature of the changes, additional guidance is expected from the IRS and Treasury. The discussion below provides some highlights of the Act, but additional guidance may provide different interpretations.
100% Deduction for Foreign Source Dividends
Historically, U.S. shareholders were taxed on the U.S earnings of foreign companies if a dividend was made or the anti-deferral subpart F or passive foreign investment company (PFIC) regimes applied.
Under the Act, the subpart F and PFIC regimes are left largely intact. However, new Section 245A provides a 100% dividends received deduction (DRD) for the foreign source portion of dividends received from a specified 10-percent foreign corporation by domestic corporations that are U.S. shareholders. A specified 10-percent foreign corporation is a foreign corporation in which any domestic corporation is a U.S. shareholder. A U.S. shareholder is a U.S. person who owns 10-percent or more of the vote or value of a foreign corporation. (See Expansion of CFC Ownership). A one-year holding period is required to claim the DRD. No foreign tax credit or deduction is allowed for exempted dividends.
