By Aman Badyal
The recently enacted Tax Cuts and Jobs Act (the “Act”) provides a deduction to domestic C corporations that receive foreign source dividends from a “Specified 10%-Owned Foreign Corporation.” For purposes of this deduction, a Specified 10%-Owned Foreign Corporation is any foreign corporation that is (i) at least 10% owned by a U.S. corporation and (ii) not a Passive Foreign Investment Company (unless the foreign corporation is both a Passive Foreign Investment Company and a Controlled Foreign Corporation).
This deduction is not available if the recipient is a real estate investment trust, regulated investment company, domestic partnership, S corporation or individual. Additionally, the dividend is not eligible for deduction if the foreign corporation received a deduction or other tax benefit from a foreign country resulting from paying the dividend.
Dividends received from a foreign corporation are foreign source dividends in the same proportion as the corporation’s undistributed foreign earnings bear to the corporation’s total undistributed earnings. The corporation’s foreign earnings are equal to all income other than income effectively connected to a U.S. trade or business and dividends received from an 80% owned domestic corporation.
Finally, in order to qualify for the deduction, during the 731-day period commencing one year before the ex-dividend date, the U.S. corporation must hold the foreign corporation’s stock for more than 365 days and the foreign corporation must be a Specified 10%-Owned Foreign Corporation for the taxpayer’s entire holding period.
As a side note, though foreign source dividends are no longer taxable to U.S. corporations, all U.S. taxpayers (including corporations) remain taxable on their share of Subpart F Income and Global Intangible Low-Taxed Income, which will be the topic of a later CKR tax update.
In light of recent changes, all business owners with cross-border operations should consult with their tax advisors to ensure an optimal corporate structure.