Tax Reform Series 38 – Participation Exemption Deduction for Foreign-Source Portion of Dividends


Plain Language of Change:

  • A 100-percent deduction is allowed for the foreign-source portion of dividends received from a specified 10-percent owned foreign corporation by a domestic corporation that is a U.S. shareholder of the foreign corporation (a participation dividends-received deduction (DRD))

  • The DRD is available only to C corporations that are not regulated investment companies (RICs) or real estate investment trusts (REITs)

  • The DRD is not available for any dividend received by a U.S. shareholder from a controlled foreign corporation (CFC) if a deduction would be taken locally by the CFC to the extent of the dividend distribution to the U.S. parent and with respect to any income, war profits and excess profits tax imposed by any foreign country (hybrid dividend)

  • No foreign tax credit or deduction is allowed for any taxes paid or accrued with respect to any portion of a distribution treated as a dividend that qualifies for the DRD

  • A domestic corporation is not permitted a DRD for a dividend on any share of stock that is held by the domestic corporation for 365 days or less during the 731-day period beginning on the date that is 365 days before the date on which the share becomes ex-dividend with respect to the dividend

Detailed Analysis of Participation Exemption Deduction for Foreign-Source Portion of Dividends

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